Industry concern over government's 'dangerous' ESG proposals
A proposal that would empower the government to intervene in local government pension investment decisions where they contradict British foreign policy has raised concern in the pensions industry.
Incorporating environmental, social and governance factors into investment decisions has become increasingly popular in recent years, as schemes have looked to mitigate the risks posed by poor corporate governance and climate change and have been raising pressure on companies to cut emissions.
Under these proposals, members of LGPS funds would be at a disadvantage to their peers in other defined benefit schemes
The proposals were published in the Department for Communities and Local Government’s consultation ‘Revoking and replacing the Local Government Pension Scheme (management and investment of funds) regulations 2009’.
It states: “The secretary of state has made clear that using pensions and procurement policies to pursue boycotts, divestments and sanctions against foreign nations and the UK defence industry are inappropriate, other than where formal legal sanctions, embargoes and restrictions have been put in place by the government.”
The proposals are widely seen as looking to curtail policies of divestment against companies associated with Israel and the Israeli-Palestinian conflict.
Law commission report
Fergus Moffat, head of public policy at trade body the UK Sustainable Investment and Finance Association, said: “There’s been a conflation of terms between what the law commission terms financially material and non-material factors.”
He said that often, “divestments are completely financially material”.
Moffat said the proposals allowing government intervention in pension scheme investment were “particularly dangerous”.
The law commission released a report on the fiduciary duty of investment intermediaries in 2014. It said while financial return should be a trustee’s primary concern, “the law is flexible enough to accommodate other concerns” and that “trustees may take account of non-financial factors if they have a good reason to think that the scheme members share a particular view and their decision does not risk significant financial detriment to the fund”.
Moffat said: “The law commission’s report is the most accurate and up-to-date report on the fiduciary duty [of trustees]. What’s concerning is under these proposals, members of LGPS funds would be at a disadvantage to their peers in other defined benefit schemes.”
Catherine Howarth, chief executive of responsible investment campaign group ShareAction, said trustees should not be making politically motivated investment decisions, but government should not allow their politics or ethics to affect the investment decisions of others.
“It’s very important that trustees have unfettered discretion to make decisions in the best interest of members and exclusively in the best interest of members.”
She added: “The government, having asked the law commission to take a look at this, should be taking their advice. It’s a very strange and ill-considered piece of legislation.”
Generating tension
Dave Lyons, principal at consultancy Aon Hewitt, said it would be asking too much of funds to check foreign policy before making decisions.
“[Funds] can’t be checking government policy on international affairs to make sure their own are in line,” he said.
Divestment on ethical grounds is rare among LGPS schemes, he said, but pointed out: “You might not be doing something, but if someone tells you you can’t do it that generates a bit of tension.”
LGPS schemes typically publish details of their committee meetings, statements of investment principles and other information already, Lyons said, meaning there is transparency on why investments have or have not been made.
He added it would be interesting to see how the proposals interact with the pooling of LGPS assets and the change in manager selection and monitoring that will follow.
Limited financial impact
Mark Packham, public sector pensions leader at consultancy PwC, said the proposals were likely to have “limited financial impact”.
He said: “I think all investment decisions would be based on the financial logic for making or not making it.”
Packham added: “It is going to force the point in situations where they aren’t able to demonstrate decisions were made in purely financial terms. I don’t think it’s as significant as it would have been a decade ago.”