‘Responsible investment’ bill proposed to tackle impact of investment on economy and environment

The bill aims to help pension scheme trustees consider the wider social and environmental impacts of their investments, instead of considering factors that are only financially material.

ShareAction proposed the bill to MPs last week at an event in collaboration with the All-Party Parliamentary Group on Sustainable Finance.

The proposed bill (32 page / 4.3MB PDF) widens the idea of “best interest” to think about the consequences of investments on the wider economy, communities and the environment, and calls for the creation of a UK Council for Investor Due Diligence to research company practices and issue alerts and recommendations to investors.

The legislation would also require investors’ ‘default’ funds and any ‘sustainable’ funds to align with the ambitions of the Paris Climate Agreement, which seeks to hold global warming to below 2C and to strive for 1.5C.

The bill aims to build a transparent and accountable investment system. It makes clear that fiduciary investors, including pension fund trustees and managers of contract-based pensions, have a duty to seek out their beneficiaries’ views, to use this information to inform their stewardship and investment decisions, and communicate those decisions back to beneficiaries.

Pensions expert Michael Jones of Pinsent Masons, the law firm behind Out-Law, said the bill reflected a growing trend of trustees taking into account factors that go beyond purely financial factors in their investment decisions.

“There seems to be a slight misconception in the industry that this would fundamentally change trustees’ fiduciary duties so that trustees have a fiduciary duty to society as well as beneficiaries. I do not think this is the case and, in fact, the proposals could give trustees clarity and the necessary leeway to look at environmental, social and governance [ESG] factors holistically, and determine whether certain investments are in beneficiaries’ interests, both financial and non-financial,” Jones said.

“It is no coincidence that several market-leading schemes have needed to taper their drive to net zero and divestment in certain assets because they do not have sufficient evidence to be satisfied that ESG concerns are financially material – although the proposed bill is intended to ignite debate rather than necessarily reach parliament, the proposals seek to address that dilemma for trustees,” Jones said.

Jones said it would be a “major step-change” to require trustees to understand beneficiaries’ views.

“The proposals allow trustees to make reasonable assumptions on the likely view of beneficiaries, but it would still require trustee-scrutiny of the demographic of members and to canvas views to meet this requirement,” Jones said.

The proposed legislation would also impose more reporting and compliance requirements on pension schemes, with trustees required to publish policy statements outlining their understanding of the benefits of their investment portfolios, and their performance in delivering that benefit.

Jones said it was not clear how this would align with Department of Work and Pensions proposals for defined contribution schemes to report on net investment returns from 2021, and how trustees would report considerations of environmental or societal impact which may not produce a positive investment return.