The UK’s Law Commission should be careful not to present environmental, social and governance (ESG) based investing as incompatible with a passive, index-tracking approach, ShareAction has warned.
The lobby group was further critical of the Commission viewing ESG as a style of investing, rather than a set of criteria to be employed across all asset classes, and that the interpretation – presented in its recent consultation paper on the fiduciary duties of investment intermediaries – focused “almost exclusively” on stock selection, overlooking issues of engagement.
In its response to the Commission’s consultation, ShareAction said the interpretation of ESG matters would lead to the assumption that only active managers could employ an ESG approach.
“As a result, the consultation paper gives the impression that trustees face a one-off choice whether to ‘take an ESG approach’, and that ‘choosing’ this style of investing is likely to be inappropriate for many funds, particularly those seeking to reduce costs,” it said.
The group noted that passive investors could use indices based around ESG principles to reduce their ESG risks, and that it was a “false dichotomy to contrast ESG investing with passive investing”.
“The choice for most pension funds will not be simply to ‘consider ESG factors’ or ‘not consider ESG factors’ and then seek out products accordingly,” the consultation added.
“Rather, ESG capability should be one of the range of criteria on which potential fund managers are judged during manager selection, alongside other criteria such as cost.”
ShareAction argued that trustees should not feel obliged to maximise returns at all costs, and that the purpose of the pension fund was rather to provide a pension income that would provide a “decent standard of living”.
“Arguably, pension funds, like charities, should not be obliged to invest in ways that directly undermine the underlying purpose of their trust,” it added.
The group further argued that there would be a benefit in “clarifying and strengthening” the duties of all investment intermediaries in the investment chain, and said this could ideally occur through changes to legislation.
However, it added: “We do not suggest a wholesale codification or reform of the general law of fiduciary duties.”
Catherine Howarth, chief executive of ShareAction, said the Commission had the opportunity to “set the record straight” on trustee duties.
“We worry that, without a clarification in statute, the Law Commission’s findings will have limited positive impact on investor behaviour,” she said.
The head of the London School of Economics’ Sustainable Finance Project previously warned IPE of the problems associated with a codification of fiduciary duties, noting it was difficult to lay down “hard and fast” rules that would endure for decades.