Proposed RI bill would force trustees to consider members’ ‘best interests’

Campaign group ShareAction will present the new policy, which would strengthen trustees’ duties to implement environmental, social and governance standards, at an event in collaboration with the All-Party Parliamentary Group on Sustainable Finance on Thursday.

Although its creators acknowledge that the bill is primarily designed to start a debate rather than reach parliament, it has won the support of the APPG chair Ed Davey.

At present, fiduciary investors — primarily scheme trustees and their asset managers — have a duty to act in the best interests of their beneficiaries, an obligation traditionally understood in financial terms.

This is a harder ask for trustees than the current position as there would likely be less certainty as to whether they were complying with their duties

Anna Taylor, Linklaters

But the proposed bill, to be presented to APPG MPs and others in collaboration with Sir Ed and Oliver Hart, the Nobel prize-winning economist, would for the first time see environmental and social considerations included by law in the definition of best interests.

While stressing that its purpose is not to politicise pensions, the bill proposes “that a person’s best interests are not only financial, but also depend upon the opportunity to live in a healthy, stable, secure society and environment”.

“This is not ideological thinking, but instead reflects closer attention to the purpose of a pension: to provide a standard of living to the beneficiary,” ShareAction stated.

The bill sets out a new legal standard called “double materiality”, balancing returns against financial and societal concerns. Acknowledging that such a standard may be hard for trustees to satisfy, the bill calls for the creation by government of a “UK council for investor due diligence”.

Modelled on similar systemås in Sweden and Norway, the council’s role would be to “[undertake] due diligence into company activities and [issue] alerts and recommendations to fiduciary investors where companies are liable for adverse human rights impacts or environmental damage”, its creators stated.

How to respond to an alert would remain at the discretion of fiduciary investors, but the bill would require that they publish their responses.

This measure, combined with new requirements on default or sustainable funds tying them to Paris climate targets, form part of a collective attempt to increase transparency, according to ShareAction.

Commenting on the bill, Sir Ed said: “Government and regulatory action are needed to help us achieve our international climate commitments and to place the financial services sector on a more sustainable footing. This bill represents a clear pathway to achieving that aim, and I look forward to supporting it over the coming months and years.”

A new and uncertain course

A ShareAction spokesperson told Pensions Expert that the proposed bill is designed to build support for action, not necessarily to be taken forward by government wholesale. The group has worked with policymakers to encourage amendments to the pension schemes bill, and UK policy manager Rachel Haworth cast the bill as in the same “direction of travel” as other recent government policies.

However, lawyers have warned that the proposed double materiality standard is both without precedent and potentially undermines trustees’ certainty of their duties.

Anna Taylor, counsel at Linklaters, told Pensions Expert that, at present, trustees “are required primarily to ensure that scheme benefits can be paid, and in meeting this duty they can take account of things that would have an impact on pension scheme investment risk and returns, including for example the impact of climate change”. 

“What is proposed would be a material shift in that duty, for example, so that trustees also had to think about the consequences of their investments on the wider community as part of the ‘benefit’ delivered to their members,” Ms Taylor continued.  

“This I think is a harder ask for trustees than the current position, as there would likely be less certainty as to whether they were complying with their duties.”  

Stuart O’Brien, partner at Sackers, concurred: “The law commission’s report in 2014, and the established law prior to that, is very clear that trustees have a duty to their members, they don’t owe wider fiduciary duties to society, that’s just not a thing. And I know lots of people would like that to be the case, but it’s just not.

“You can make a very convincing argument that climate-related risks or societal risks have a knock-on effect on the financial performance of investments, and therefore trustees should take account of them,” he said. 

“Then it’s quite right for them to take [the risks] into account. But they’re taking them into account because they affect schemes’ beneficiaries, not because they have wider societal impact. I think if what you’re actually trying to do is to effectively create a statutory responsibility between trustees and wider society, that would be something new.”

Responding, Ms Haworth said the new bill would not confuse trustees’ role: “Rather, there has always been confusion around what it means for trustees to act in members’ best interests, which this bill seeks to clarify. We know that many investors recognise the importance of non-financial factors, but some have felt nervous about acting on these as, to date, there has been insufficient clarity about the legal parameters of what they can do.”

An Australian-style, climate-based litigation system

Such measures as described in the ShareAction bill may be unnecessary, however, should recent events in Australia be any guide.

A law suit was brought against the Retail Employees Superannuation Trust by one of its members, Mark McVeigh, who sued it for failing to provide him with information on how it was managing the risks of climate change.

The parties agreed to settle, and in a statement the trust agreed to a 2050 target for net-zero emissions, pledging to ensure its investment managers take “active steps” to measure and manage the financial risks posed by climate change, including reporting back to the trust, which will in turn report back to its members.

Mr O’Brien told Pensions Expert that, although some of the peculiarities of Australian law are different to UK law, the two systems use similar prudence tests for trustees. 

“Under English law, trustees are supposed to act in accordance with what’s known as a prudent person test, which applies to investment decisions, as well as lots of other trustee decisions. It’s very similar [to Australian law],” he said.

“So I think that creates quite an interesting read across — you’ve got trustees in Australia, subject to a statutory standard of prudence. And then in the UK, you’ve got trustees bound to similar standards of prudence.

“I just wonder whether that might open up the possibility of a member in an English pension scheme bringing a similar claim for a similar breach of prudential standards.”