The significant progress that has been made in new rules for the Local Government Pension Scheme (LGPS) which requires policies on how funds consider environmental, social and governance (ESG) factors and stewardship is at considerable risk unless remaining concerns relating to the draft regulations are addressed.
The industry body representing long-term investors in the UK are extremely concerned that:
– The Government has conflated ESG issues and non-financial factors. The Law Commission’s 2014 report on fiduciary duties made very clear that ESG factors can be financially material and should be taken into account.
– funds should be invested in-line with UK foreign policy and a new ‘Power of Intervention’ will allow the Secretary of State to interfere in the investment processes of a fund where investment decisions run contrary to it. The power to determine how funds are best invested should remain with the local authorities accountable to pension scheme members.
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Fergus Moffatt, UKSIF Head of Public Policy, said “The proposed investment regulations have taken strides forward in terms of requiring schemes to have policies on ESG and stewardship and they have finally started to reflect industry best practice. However the apparent confusion over what factors are financial and non-financial remains extremely concerning. As does proposals that investments should reflect UK foreign policy- something that changes with the Government of the day, potentially every five years. The disruption could pose a serious risk long-term investment strategies.
“The Government should publish its guidance making clear that the Secretary of State’s new power of intervention will only be used when a fund is seen to be in breach of its fiduciary duty to scheme members”.