UK Directive Could Boost ESG Investments

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.

“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.”