Local authority funds should collaborate on responsible investment guidelines to ensure new investment regulations meet global best standards, the Environment Agency Pension Fund (EAPF) has urged.
Amid concerns by responsible investment (RI) groups that the UK government’s attempt to outlaw perceived politically driven divestment were “incoherent” and conflating financially material and non-financially material factors, the EAPF proposed that a working group on RI be established to draft guidance for local authority pension schemes (LGPS).
Responding to the Department for Communities and Local Government (DCLG) consultation on LGPS asset pooling and changes to investment regulations, it suggested the draft regulation be amended to remove any doubt that environmental, social and governance (ESG) considerations should all be taken into account, rather than just one of the three at any one time.
The EAPF also proposed that the regulation refer more broadly to the need for a focus on RI, and urged the inclusion of a new clause requiring the LGPS to comply with the evolving national and global standards on stewardship.
The suggestion was in recognition, the fund said, of the potential emergence of a global stewardship code in the near future but also an acknowledgement of how Japan’s code had evolved best practice established in the UK’s own document.
Guidance on RI matters would be drafted by a working group of LGPS practitioners, subject to consultation on the final wording, to ensure it represented best practice, the fund said.
Politically motivated divestment
The EAPF also asked the government to clarify recent pronouncements that local authority funds should not pursue politically motivated divestments, arguing that any investment strategy – which stretches across several election cycles due to its long-term nature – should simply be risk-based.
It suggested the government issue clear guidance on how it expects funds to act, working closely with the LGPS Scheme Advisory Board to detail which legal conventions the UK had signed and should be respected.
“However,” the fund added, “we express considerable caution that the guidance should not be politically motivated and should be signed off by the LGPS Scheme Advisory Board, advised by the investment sub-group whose role is to consider ESG risk areas.”
It also proposed that any guidance for investment policies should allow for decisions in line with fiduciary duties, as outlined by the recent Law Commission report on the matter.
The Department for Work & Pensions recently declined to formalise new rules for private sector pension funds based on the commission’s recommendations.
The EAPF’s views were echoed by the UK sustainable investment association in its own response to the LGPS consultation.
UKSIF’s head of public policy Fergus Moffatt said the proposals to stop councils divesting was “extremely worrying and incoherent” and argued that the very taxpayers the rules purported to protect were at greater risk if certain assets became stranded assets.
“This should not be about politically motivated investments, rather ensuring investment decisions are made in the best interests of savers,” he said.
The association’s response backed the EAPF’s call for guidance on how UK foreign policy should be reflected in investment decisions, and argued that any step taken by the government to intervene in investment decisions should only examine whether there was a breach of fiduciary duties.
“If it is the government’s intention only to use the power of intervention in relation to decisions based on non-financial factors that run contrary to UK foreign policy, it should make this clear,” Moffatt said, “as decisions based on other non-financial factors – such as the tobacco example – will still be considered legitimate.”