The UK government should work with the pensions and investment sectors to establish an “agreed responsible investing framework”, a consultancy has suggested.

Aon made the recommendation in its response to a consultation by the Department for Work and Pensions (DWP) on regulatory changes aimed at “clarifying and strengthening” trustees’ investment duties, in particular with respect to environmental, social and corporate governance (ESG) matters.

Working towards an agreed responsible investing framework would enable the regulations to be effective, according to the consultancy.

One of the main changes proposed by the DWP was a rewording of current rules for occupational pension schemes to make it clear that trustees should consider financially material ESG matters.

According to the consultancy, a key action for governments should be to “encourage and improve consistent, standardised and transparent disclosure” of information relevant to evaluating ESG factors.

Such evaluation was problematic at the moment and “from the investor’s viewpoint this can legitimately be used as a reason not to act”.

The consultancy said its research had shown a lack of consensus about the impact of responsible investing on returns and a lack of standardisation of definitions across the industry, which together posed “one of the biggest hurdles for investors”.

“What is clear through our involvement and interaction with trustees and other institutional asset owners is that while there are many groups that are engaging with this topic, there is still significant confusion around terminology, materiality and, more relevantly, what trustees’ duties are in this area,” said Aon.

“We therefore believe that the government has an important role to play in setting standards, clarifying duties and responsibilities, and providing the tools and access to reliable data that is necessary to assess financially material risks.”

The DWP’s recent investment regulation proposals were helpful, Aon suggested. It said these would “encourage and ultimately lead to greater standardisation and agreement across the industry, which we see as a necessary first step towards greater adoption of [responsible investing] principles by trustees”.

‘Problematic’ members’ views proposal

Meanwhile, a proposed requirement to take members’ views into account was “the most problematic aspect” of the policy changes proposed by the DWP, according to Aon.

The government has proposed that trustees be required to make a statement on the extent to which its membership’s views would be taken into account regarding investment decisions. Aon said it was supportive of the general direction of the proposal but suggested the draft regulations, if unchanged, could be misunderstood.

“Under the draft regulations, regardless of caveats, most trustees will feel they have to actively seek those views from members, especially in [defined contribution] schemes where the information will be made public,” the consultancy said.

“This could be a difficult and costly exercise for schemes, with substantial challenges to obtaining members’ views in a meaningful way.”

The UK’s pension fund association rejected the changes proposed by the government, describing them as neither “practical nor purposeful”.