Government’s rejects Law Commission recommendation that pension trustees should take account of ESG issues



ShareAction and The UK Sustainable Investment and Finance Association (UKSIF) today expressed disappointment at the Government’s rejection of the recommendation from the Law Commission to make clear in regulation that pension trustees’ should take account of environmental, social and governance (ESG) issues where these are financially material (or may become so), and may consider wider ethical factors under certain circumstances.

The government’s consultation sought views on recommendations made in the 2014 Law Commission report ‘Fiduciary duties of investment intermediaries’. The report highlighted that pension scheme trustees should take into account all financially material factors including ESG and may take non-financial factors into account in certain circumstances and examined the positive role of good stewardship. It recommended that the distinction between financial and non-financial factors be clarified in law via the Investment Regulations, something that was accepted by the Coalition Government which issued a consultation in February.

UKSIF’s submission to the consultation, which was based on member feedback, backed the Law Commission report in calling for clarification of fiduciary duty and regulations that encourage high quality stewardship. The Government’s response, published today with a foreword from Pensions Minister Baroness Altmann, is in stark contrast to the Law Commission report and argues the recommended clarification ‘would not necessarily lead to greater clarity for trustees’.

The Government cites a lack of harmony amongst consultation responses as a reason for inaction. This is despite the Government supporting the Law Commission’s conclusions on fiduciary duties, and recognising that many respondents backed change.

ShareAction believes that a lack of consensus amongst respondents as to how the regulations should be amended should be no barrier to clarifying the regulations. The Government’s best practice on consultations, cited in the response, says: “Departments will need to give more thought to how they engage with and use real discussion with affected parties and experts to make well informed decisions”. There has been ample time since the consultation closed six months ago to bring interested parties together to ensure consensus could be reached, but the Government has entirely missed this opportunity, instead relying on the kind of traditional consultation methods that it claims to be leaving behind.

Even more surprisingly, the Government states today that, following the Law Commission’s report, pension scheme trustees now have a ‘good awareness’ of their duty to consider financially material factors- this comes despite confusion last year from trustees of Parliament’s own pension scheme over what constitutes financial and non-financial factors.

This flies in the face of the evidence ShareAction presented to DWP in April, indicating that schemes are still failing to take material issues like climate change into account. The Government’s statement also ignores other evidence in the Pensions and Lifetime Saving Association’s survey of pension funds which paints a very different picture, such as the fact that 36% of respondents said their trustee board was not even aware of the Law Commission’s conclusions.

Simon Howard, Chief Executive of UKSIF, said: “We are extremely disappointed with the Government’s response – this represented a key opportunity to help put UK finance on a more sustainable footing and it has been missed.

“Many trustees are trying to do the right thing despite the inadequate regulatory background, but they deserve explicit regulatory support of the kind that would force laggards to catch up to protect member interests. The Government says guidance from regulators is enough, that is wrong. The world’s governments are gathering in Paris to try to address climate change; if the threat is important enough for that it’s important enough to change some regulations.”

ShareAction’s Chief Executive, Catherine Howarth, said: “Government should have robust reasons for rejecting the Law Commission’s recommendation. Disagreement from respondents on the detail of changes to regulations falls well short of that standard. Why has the Government ignored the chance to bring interested stakeholders together to think this through, and instead taken six months to produce an old-school consultation response rejecting change?

While it is welcome that the Government remains committed to the Law Commission’s view of the law on fiduciary duty, the suggestion that the majority of schemes are dealing adequately with ESG questions risks prejudicing savers’ best interests. Pension trustees need clarity in statute on their fiduciary duties, allowing them to make good decisions on behalf of UK pension savers in a challenging investment context.

“The Government could still take the opportunity to work with stakeholders to find a consensus position that overcomes an antiquated and narrow view of fiduciary duty.”


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