The Department for Work and Pensions (DWP) has released an updated response to its statement on a trustee’s investment duties in a bid to establish a clearer distinction between ethical and financial considerations in ESG investing.
The update follows an initial consultation paper called “Clarifying and strengthening trustees’ investment duties” published by DWP in June, which aimed to encourage trustees to incorporate environmental, social and governance (ESG) criteria into their investment process.
The initial proposals had received criticism from industry associations such as the PLSA for suggesting that trustees should publish a statement on their member’s views and how they connected to the respective scheme’s investment strategy.
Pension’s minister Guy Opperman responded in the updated proposals by stating: “It was not our intention to give the impression in our original consultation proposals that trustees must survey pension scheme members or must act on members’ views about how their scheme is invested.” At the same time, he stressed that it could be valuable for trustees to take action based on members views in certain circumstances.
Nigel Peaple, director of policy and research at the PLSA, also backed this view. “..the new regulations should help trustees understand when an issue is a financial consideration or an ethical one.”
Emma Douglas, head of DC at Legal & General Investment Management, also welcomed the proposals stressing the importance of defined contribution (DC) schemes to incorporate ESG transparency into their default strategies, another key element of the proposals.
“Over 90% of defined contribution pension savers are invested in the default option,” she added. “Trustees must beware that simply offering members an ESG fund choice among many does not, as the government notes, equal adequate discharge of fiduciary duty.”
Catherine Howarth, chief executive at ShareAction, highlights that the industry responses to the proposals to incorporate ESG factors were overwhelmingly positive: “This is a major development, for which we have long fought, and we commend the government on this action to protect UK pension savers. Working people in the UK deserve 21st century risk management of their retirement assets and investment strategies that anticipate the impacts on portfolios of issues like climate change,” she stresses.
Following the publication of the updated DWP consultation, trustees are now being given a one year deadline until October 2019 to update their investment principles and highlight ESG compliance in their default arrangements. In two years, schemes will be required to publish an additional implementation statement showing any action taken in order to for investments to be compliant with their principles.
The updated consultation paper on trustees’ duties can be accessed here.
