Out-Law News 2 min. read
18 Jun 2018, 3:53 pm
In a consultation document (37 page / 544KB PDF) published on Monday, the Department for Work & Pensions laid out plans to require trustees of occupational pension schemes to lay out how they take account of ‘financially material considerations’. These are factors which could affect an investment in the future, for example if the value of shares in fossil fuels plummets as a result of a shift to renewable energy sources.
Trustees will have to update or prepare statements of investment principles (SIPs) to set out policies in relation to the stewardship of investments, including how voting rights are exercised. They will also have to prepare a statement setting out how they will take account of savers’ views on these investments, although they will not be forced to invest in line with these views. Defined contribution schemes will need to make their updated SIPs publicly available.
Pensions expert Carolyn Saunders of Pinsent Masons, the law firm behind Out-Law.com, said the proposals would be helpful to trustees.
“Many trustees already risk being in breach of duty for having failed to consider whether environmental, social and governance (ESG) factors pose a financially material risk to their investments. In the main, this is because of misunderstanding rather than anything deliberate - so this proposal to clarify the position is timely,” said Saunders.
“The proposals around publicising investment strategies and taking steps to understand members’ views on ESG factors may just bring an added benefit – that of improving member engagement, which is something that all schemes will welcome,” said Saunders.
The government said it was not seeking to direct trustees’ investment or divestment decisions, and trustees should focus exclusively on financially material risks and opportunities rather than members’ views on issues such as climate change.
“These proposals are not intended to give any support to activist groups for boycotts or divestment from certain assets. Trustees have primacy in investment decisions and, whilst they should not necessarily rule out the ability to take account of members’ views, they are never obliged to, and the prime focus is to deliver a return to members,” said the consultation document.
Instead, the government said the proposals were designed to give institutional investors confidence to begin or increase allocations in areas such as social impact investment or green finance.
The changes are likely to come into force on 1 October 2019, assuming the regulations are laid before parliament in the autumn of 2018.
From October 2020, trustees of defined contribution schemes would also be required to produce and publish an implementation report setting out how they acted on the principles laid out in the SIP.
The consultation is open until 16 July.
The proposals follow a recent report by a House of Commons committee which concluded that the government should make it mandatory for large companies and asset owners such as pension funds to report their exposure to climate change risks and opportunities.