UK Directive Could Boost ESG Investments | Chief Investment Officer

The UK’s Department for Work and Pensions (DWP) has launched a consultation that would empower pension trustees to give environmental, social, and governance (ESG) risks more consideration when making investment decisions.

The consultation is seeking opinions on the draft Occupational Pension Schemes Regulations for 2018, and is aimed at pension trustees and managers, pension members and beneficiaries, pension plan service providers, industry bodies and professionals, and civil society organizations.

The proposed regulations would amend the steps trustees need to take when creating or revising their statement of investment principles (SIP). An SIP is a written statement governing an occupational pension’s decisions about investments. The regulations would also require pension trustees to publish the SIP, as well as an annual report on how they implemented it.

The DWP is proposing to require trustees to prepare their SIP to set out how they take account of financially material considerations, including those arising from ESG issues. This includes engagement with investee firms, and the exercise of the voting rights associated with the investment.

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“There is evidence of trustees incorrectly thinking that environmental, social, and governance risks are irrelevant to, or run counter to, financially material concerns,” said the DWP. The department cited research that found that many trustees consider ESG factors and external governance reviews to be low priorities.

“Some participants were not sure what ESG meant,” said the DWP. “Some see ESG as a distraction or potentially detrimental to achieving the scheme’s goals.”

The proposed regulations are intended to encourage trustees to:

Take account of financially material risks, whether these come from investee firms’ traditional financial reporting, or from broader risks covered in nonfinancial reporting.
Fulfill the responsibilities associated with holding investments in members’ best interests through a range of stewardship activities, such as monitoring, engagement, and sponsoring or co-sponsoring shareholder resolutions.
Have an agreed approach on the extent to which they will take account of members’ concerns, not only about financially material risks such as ESG, but the plan’s investment strategy as a whole.

While the guidelines will help further a plan’s ESG investments, the DWP said the proposals are not intended to give any support to activist groups for boycotts or divestment from certain assets.

“Trustees have primacy in investment decisions,” said the DWP. “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.”

Tags: Department for Work and Pensions, ESG, Pension, UK

The IRS has issued a notice saying that it and the Department of the Treasury plan to propose regulations that will not only provide clarification on the so-called endowment tax, but could lessen the hit to colleges and universities who are subjected to it.

The Tax Cuts and Jobs Act of 2017 added section 4968 to the tax code, which imposes a 1.4% excise tax on the net investment income of private colleges and universities with at least 500 students, and with assets of at least $500,000 per full-time student. According to the IRS, an estimated 40 or fewer institutions are affected by the tax.

The proposed guidance states that any institution that is subject to the excise tax that sells property for a profit can use the fair market value of the property as of Dec. 31 2017, as its basis for calculating the tax on any gain. In many instances, the new stepped-up basis rule will reduce the amount of gain subject to the new tax, the IRS said. The normal basis rules will still apply for calculating any loss.

The Treasury and IRS also said they intend to propose regulations under which losses may offset gains to the extent of gains, but no capital loss carryovers or carrybacks will be allowed. Proposed regulations also may permit losses from property sales by related organizations to offset gains realized by other related organizations.

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Until the new regulations are issued, the IRS said that “affected taxpayers may rely on the special basis step-up rule described in the notice.” The notice also requests public comment on other issues addressed in the notice, “as well as any other matters that should be addressed in future guidance.”

In March, Congressmen John Delaney (D-MD) and Bradley Byrne (R-AL) introduced a bill to repeal the endowment tax. The Don’t Tax Higher Education Act bill has the support of the American Council on Education, the Council for Advancement and Support of Education (CASE), the National Association of College and University Business Officers, and the National Association of Independent Colleges and Universities.

“Our tax policy should encourage donors to make charitable gifts supporting wider access through scholarships, research, and academic programs at colleges, universities, and independent schools,” said Sue Cunningham, CEO of CASE, in a release. “It should not penalize donor generosity.”

The bill has been referred to the House Committee on Ways and Means.

Tags: Department of the Treasury, Endowment Tax, IRS, Tax Cuts and Jobs Act of 2017