UK - Members from the UK's upper parliamentary house have clarified pension fund trustees are legally allowed to consider responsible investment in any of its decisions concerning assets held by the fund.

Lord McKensie told fellow members in the House of Lords on 7 October - during a debate on the latest draft of the Pensions Bill - he recognised many trustees believe the current law does not allow them to consider ethical issues when making investment decisions on behalf of the fund or to divest from a company on SRI grounds where they feel it is appropriate.

McKensie has now confirmed trustees can consider SRI issues if they deem it appropriate, alongside all aspects of governance when making pension fund investment selections.

"There is no reason in law why trustees cannot consider social and moral criteria in addition to their usual criteria of financial returns, security and diversification. This applies to the trustees of all pension schemes. Of course, disinvesting may not be the most appropriate approach for pension scheme trustees looking at the long-term sustainability of their investments. Engagement might be the right approach in any particular case.

His comments were made in response to an amendment of the Pensions Bill from Lord Judd which suggested there should be a requirements on trustees to set out their responsible investment policy in writing and regularly review, but which went further than current requirements by suggesting trustees should be given the right disinvest on the grounds of crimes against humanity, war crimes or genocide.

Proposing the amendment on behalf of Lord Judd - who could not be present at the second reading of the bill - Lord Joffe said:

"Some trustees believe that the law does not permit them to take ethical practices into account in making their investment decisions. Rather more trustees question whether it is lawful for them to actively engage with corporations in relation to what they see as unethical practices. Even more trustees do not believe that they are permitted by law to disinvest from corporations whose practices they see as anti-social, anti-environmental or anti-human rights," said Joffe.

McKensie noted pension fund officials are already required to specify in the pension fund's Statement of Investment Principles what the fund's guidelines are on responsible investment and "to what extent social, environmental or ethical considerations are taken into account", adding "that is an obligation on trustees - not simply a right or an option".

Many pension trustees are aware they were legally allowed to include responsible investment considerations in any decisions - thanks to a clarification from a legal case brought by Freshfields Bruckhaus Deringer some years ago.

But pension funds also cite present legal requirements confirming trustees have a fiduciary responsibility to act in the best interests of its members, so trustees are understood to be unclear how far they can consider SRI.

This is in part because there has been pressure on pension funds in recent years from lobbying groups, member and unions to divest from certain types of investments, such as armaments manufacturers, as has been the case for the Merseyside pension fund which has repeatedly calls for a member vote on the banning of certain sectors and companies from their investment universe. (See earlier IPE story: Liverpool pushes again for Merseyside ethical policy)

Joffe sought to highlight other comments in Judd's quest for an amendment by stating out the former pensions minister, Mike O'Brien, recently pointed out a particular he himself earlier made, stating: "If we are to build a more successful, vibrant, modern economy we can no longer afford to view economic success as being in conflict with social and environmental goals. On the contrary, these goals must be seen as integral to economic success and the very essence of sustainable development."

Commenting on the statement from McKensie, Duncan Exley, director of campaigns at FairPensions, the charity promoting responsible investment, said: "The government has taken a positive step in clarifying that responsible investment is legal. This reinforces the growing industry consensus that responsible investment is not outside the fiduciary duties of trustees. Combined with increasing evidence that responsible investment brings performance benefits, this statement shows that trustees should be taking proactive steps to monitor and manage environmental, social and governance risks and opportunities."

Following the clarification from McKensie, the proposed amendment was subsequently withdrawn from inclusion in the Pensions Bill.

Does this clarify the position of pension funds once and for all concerning responsible investment or is there still some leeway for interpretation? If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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