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UK government holds out prospect of social impact investing clarity

The UK government has responded positively to recommendations made by the Law Commission for removing barriers in the way of pension funds considering social impact as part of their investing. 

In the government’s interim response to the commission’s report, Guy Opperman, minister for pensions and financial inclusion, and Tracey Crouch, minister for sport and civil society, said:

“Government welcomes the recommended changes to the investment regulations and is minded to make the proposed changes, subject to consultation with stakeholders on the most effective approach to delivering the desired outcome of the recommendations.”

In its report published in June, the Law Commission — a non-political body advising on legal reform — recommended that investment regulations for trust-based pensions be amended to ensure that “social, environmental or ethical considerations” accurately reflected the distinction between financial factors and non-financial factors.

A requirement should also be included that the statement of investment principles (SIP) produced by trustees state their policy on stewardship, the commission said.

In its response, the government said it recognised the Law Commission’s advice that regulatory clarity would help remind trustees that they should take account of all relevant financially material factors, whether these were “traditionally” financial or related to broader risks or opportunities, such as environmental, social and governance issues.

It said it was minded to require that the SIP must include trustees’ policy on evaluating long term rirsks, and any policy on consideration of members’ non-financial concerns.

The government said it supported the commisson’s view that trustees should consider members’ ethical and other concerns, and may act on them on certain conditions, such as that this does not involve a risk of significant financial detriment.

For contract-based pensions, the commission had recommended that the Financial Conduct Authority (FCA) require schemes’ Independent Governance Committees to report on a firm’s policies in relation to evaluating long-term risks of an investment, including relating to corporate governance or environmental or social impact; considering members’ ethical and other concerns; and stewardship.

The commission said in June that there were “no substantive regulatory barriers” to making social impact investment by pension funds, and that most of the barriers were structural and behavioural. However, there was a need for clearer legislation and guidance.

Of the other options for reform put forward by the commission, Opperman and Crouch said certain recommendations here were addressed by initiatives already underway.

“Other recommendations involve or impact a number of government and external stakeholders and work is ongoing to determine the appropriate response,” they said in the response document.

The Pensions and Lifetime Savings Association (PLSA) welcomed the government’s response.

“This is a welcome proposal that will make expectations of pension funds clear and align the investment regulations with other statements from the Law Commission and The Pensions Regulator,” said Luke Hildyard, the industry body’s policy lead for stewardship and corporate governance.

He said it was an extremely important issue and there was compelling evidence that environmental, social and governance (ESG) considerations had a big impact on investment returns.

Simon Jones, head of responsible investment at Hymans Robertson, welcomed the prospect of clarity in the language used in engaging investors on responsible investment, as this was lacking. 

“Ethical considerations are often viewed as interchangeable with financially material ESG factors, something that is not helped by the wording of the current investment regulations,” he said. “This misunderstanding can mean that issues are not effectively debated.

“It’s therefore welcome that the government is looking to consult on clarifying regulation in this area by separating the consideration of financial and non-financial factors in investment decision making.”

Environmental law organisation ClientEarth also welcomed the government’s response and said it would require pension schemes to report on climate risk where it poses financially material risks to the fund.

“Even though the law is already clear, those in charge of our savings are overlooking one of the biggest risks out there,” said Natalie Shippen, pensions lawyer at the firm.

Catherine Howarth, chief executive of responsible investment campaign organisation ShareAction, said that as powerful investors, it was essential pension funds focussed on long-term risks and opportunities such as those connected with climate change and social inequality.

She criticised the FCA for inaction on the issue.

“The FCA, on the other hand, is still sitting on its hands,” she said.

“We’re disappointed they haven’t yet chosen to follow the Department for Work and Pensions in adopting the recommendations made by the UK Law Commission,” Howarth said.

The government said it liaised closely with the FCA in preparing its interim response as a number of the Law Commission’s proposals were addressed to the regulator. 

The government relayed that the FCA sees the Law Commission’s report as consistent with a number of pieces of work the regulator was undertaking, and is considering the commission’s proposals. 

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