Government sets out proposals for trustee ESG investment duties

In 2017, the government said it was “minded” to make the changes proposed in the UK Law Commission’s 2017 report on ‘Pension Funds and Social Investment’.

Trustees will need to ensure they are careful in their communications to members so that they do not raise members’ expectations

Jay Doraisamy, Mayer Brown

The Department for Work and Pensions has now published a consultation on clarifying and strengthening trustees’ investment duties.

Trustees to outline response to member views

It proposes that trustees should consider and make a statement on “how they will take account of the views which they consider scheme members hold in the development of the policies” within the scheme’s statement of investment principles.

This can include members’ views on both financial and non-financial matters that may be relevant to the trustees’ investment and stewardship decisions.

However, trustees would retain control of investment decisions – and would not be required to act on any particular concern. If the trustees have gathered evidence that members have a particular view on a non-financially material matter, they are free to consider whether or not they will act on it.

By linking this requirement to the development of the investment policies, rather than including it as a policy within the SIP, the government said it wants to avoid giving trustees any impression that investment should be made in line with members’ preferences. They would first be required to prepare this statement from October 2019.

Furthermore, the government has proposed that trustees report each year on how they have implemented their SIP policies, explaining any change made during the scheme year and the reason for the change.

Tackling confusion

The consultation also focuses on the wording of current regulations, which require trustees to report their policy on “the extent (if at all) to which social, environmental or ethical considerations are taken into account”.

It proposes that trustees are instead required to state their policy on the evaluation of “financially material” considerations. It adds that this includes but is not limited to environmental, social and governance considerations, including climate change.

In a statement, secretary of state for work and pensions Esther McVey said “these new regulations will empower savers all over Britain, ensuring that their voices are heard when their savings are invested”.

Rachel Haworth, senior policy officer at Share Action, welcomed the consultation, noting that “there still is a problem with pension trustees ignoring ESG risks that are financially material to their investments”.

This results partly from a general lack of understanding, groupthink and a lack of attention brought to the issue by their consultants when setting their investment strategy, Haworth said.

There is a confusion between ESG and ethical non-financial concerns, and “financial risks and opportunities aren’t being fully appreciated”, she said.  

Stuart O’Brien, partner at law firm Sackers, said reporting each year on how they have implemented SIP policies “could be quite a helpful exercise for trustees”, ensuring a high quality of SIP, rather than one that focuses on legal box-ticking.

Unhelpful for DB trustees

Earlier this month, the Environmental Audit Committee called for a requirement for schemes to actively seek the views of their members when producing their statement of investment principles, a move experts said could complicate matters for trustees of defined benefit schemes.

O’Brien noted that the DWP consultation’s proposal to only require a statement explaining whether or not trustees take account of members’ views would still allow boards the freedom to ignore them if they see fit.

However, while trustees are not mandated to actually do anything on member views, “I am worried that this bit will be seized upon or misinterpreted” leading to “a run of schemes doing member surveys on all sorts of things, which won’t necessarily be helpful for DB schemes”, he said.

Jay Doraisamy, co-head of pensions in law firm Mayer Brown’s London office, said DB trustees have a primary duty to maximise the investment returns, as recognised in the consultation.

“The extent to which they take into account the views of the membership in preparing or revising the SIP has to be considered in that context,” she noted.

The consultation makes it clear that trustees are “never required to act on any particular concern”.* Therefore, “trustees will need to ensure they are careful in their communications to members so that they do not raise members’ expectations” regarding non-financial matters, Doraisamy said.

Helen Prior, senior client manager at Cardano, welcomed the additional guidance that the draft regulations provide for trustees. However, she noted that “the additional time and effort required on the part of trustees, pension managers and advisers should not be underestimated”.

She added: “In particular, finding the optimal way for each scheme to take member views into account proposes a number of practical and philosophical challenges.”

*This sentence has been corrected to show that the consultation, rather than the draft regulations, makes it clear that trustees are “never required to act on any particular concern”.