UK - Pension funds may increasingly be able to argue the need to apply ESG principles to all invesment management, according to pensions and legal experts, as ESG strategies could in future be related to the wealth creating capacity of economies.

Speaking at the National Association of Pension Funds (NAPF) seminar on Corporate Governance, Penny Shepherd, chief executive of UKSIF, told delegates any way forward on implementing responsible ownership within trustees' fiduciary responsibilities needs to be prudent and proportionate.

But she added trustees can also "take a far-sighted interpretation of what is in the best interests of your beneficiaries, I would argue".

Shepherd noted there is a general acceptance that trustees' fiduciary responsibility includes protecting and enhancing value, particularly of its own investments.  She suggested, however, that there is now an "emerging agenda from pension funds that it is permitted and arguably required that we need to start looking at the overall wealth creating capacity of the economy as well". This covers issues such as climate change, and the impact of a potential 'perfect storm' in 2030 when issues on food security water access and human conflict could adversely affect economies.

In her presentation, Shepherd suggested pension trustees could "actually influence and ensure there is an effective public policy framework within which they can exercise responsible ownership and investment". Yet she noted one of a number of barriers to integrating responsible ownership into fiduciary responsibilities includes ineffective incentives.

"At the end of the day, if this does not move mandates, if you do not pick your agents based on whether or not they can deliver good governance rather than requiring it as a sort of free add-on it will not happen. If it moves mandates it will affect the policy of what is done, if it doesn't move mandates then it won't."
Setting out the legal framework for responsible ownership and fiduciary responsibilities Robert West, partner at law firm Baker & McKenzie, recognised there are very few pension cases used as a reference because the tendency is for disputes to be settled out of court.

The primary pension case, and benchmark for these issues, therefore still tends to be the 1984 judgement in Cowan Vs Scargill, when the court ruled ttrustees may not put their own, or the members, ethical or social principles before the priority of investing assets in the best financial interests of members.

West said: "This sounds like a very narrow configuration of trustee duties and in some senses it is. But I think looking at how the law has developed, we find that the tendency to use Cowan Vs Scargill as a means of saying 'we must not do this and are constrained by this', needs to be put in a much broader context."

He said developments in case law outside of the pension arena, involving charities and private trust cases, suggest there is some support for the potential for trustees not to just have an option of getting involved in governance, "but actually in some circumstances moving towards the position where there may be an obligation".

West emphasised: "Now that is not where the law is now, but you can see how it may well move in that direction." In his view, the requirement for trustees to state in the Statement of Investment principles (SIP) their approach to ESG considerations, for example, also carries with it "a requirement to consider meaningfully the trustees' attitude and approach towards those issues".

He added while investing assets in the best financial interest of members is paramount, if a court were to consider these issues it "would look at a much wider backdrop of what creates value in investment and look at the longer-term, and look at additional considerations which trustees should quite properly be taking into account when exercising investment powers".

Shepherd said while there is often concern among trustees about whether an action is legal, trustees should bear in mind their responsibility is to "intend genuinely to act in the best interests of beneficiaries and to follow due process and to behave in a proportionate and reasonable way. It is not to have an effective crystal ball".

She argued if trustees ask a legal adviser whether something is legal "you will almost certainly get an over cautious reply". However, trustees could instead set out the process and the advice they've received to reach a decision and then ask if there is "any reasonable legal objection" to the steps taken.

"If you ask these sort of questions you will get sensible legal advice which fundamentally enables you to take sensible and proportionate action," said Shepherd.

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