Ethical pension investment considerations secondary to performance

Out-Law News | 22 Aug 2018 | 10:00 am | 2 min. read

Press scrutiny over the investment practices of local authority pension schemes shows the difficulties faced by advisers when balancing different investment considerations, an expert has said.

The Guardian reported this week that local authority pension funds directly hold £1.7 billion worth of stock in tobacco companies; as well as a further £1.1bn by way of pooled investments, over which they have less control. The figures were compiled from over 100 freedom of information requests with various UK councils.

Pension scheme trustees must take factors such as environmental, social and governance issues into account where they pose financially material risks.  Otherwise, trustees can only consider ethical considerations (such as a moral disapproval of certain industries) if they have good reason to think that scheme members would share their concerns, and the decision does not involve a risk of significant financial detriment to the scheme assets.

Pensions expert Nick Stones of Pinsent Masons, the law firm behind, said that this meant that trustees could not be swayed by ethical considerations that could be to the detriment of the overall financial performance of their combined investments.

"The question of whether something is a potentially good or bad investment is the role of the professional investment adviser and something funds spend much time in considering," he said. "To arrange investments on the basis of a media storm or a vociferous lobby group on an ethical issue that has a potentially detrimental impact on investment performance would be foolish."

"The law has not fundamentally changed from the time a generation ago when the mineworkers union queried why the British Coal pension fund was investing in rivals to their industry.  The principle remains the same: invest to the pecuniary benefit of the fund and extraneous matters are usually secondary if there is no economic impact," he said.

Stones emphasised that trustees must take account of factors such as climate change where these could have a material impact on investment performance.

"Here, the point is simple: whether, for the period in question it is a bad investment," he said.

Earlier this year, the House of Commons Environmental Audit Committee suggested that some trustees misunderstood the nature of their so-called fiduciary duties as a need to "maximise short-term returns", an approach which could result in them underestimating longer-term risks. It subsequently wrote to the UK's top 25 private sector pension funds to ask them how they manage the risks that climate change poses to pension savings.

A report by Pinsent Masons and the University of Leeds, published in April, sought to clarify how trustees should consider climate change as part of their investment strategy in an appropriate and proportionate way, despite the lack of a coordinated approach on how these factors should be taken into account. The government has since backed the recommendations of an industry taskforce on social impact investment, and pledged to take action to better enable people to invest in line with their values.