Law Commission says trustees can take ESG into account (to a point)

The Law Commission yesterday published its much anticipated report clarifying the fiduciary duties of trustees, and has called upon the Pensions Regulator to provide further guidance on the subject.

Last year, the commission issued a consultation paper to clarify, among other things, “how far those that invest on behalf of others may take into account factors such as social and environmental impact and ethical standards”. The answer is: to a point.

We have reported recently on schemes such as Strathclyde and the West Midlands that have made social impact investments, which may have put them in jeopardy of breaking their primary fiduciary duty of maximising returns.

The commission concluded that due to the long-term nature of the liabilities of pension schemes, trustees do not have to “maximise returns” in the short term at the expense of risks over the long term.

The report stated trustees “should take into account factors which are financially material to the performance of an investment”. And where it is thought ethical or environmental, social or governance issues are “financially material” they should be taken into account. 

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