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Pension funds & Social Investment – plus ESG, Stewardship and Ethics

Pension funds and social investment: interim (government) response  – 18 December 2017

snowmenSRI Services welcomes today’s report, which we view as taking pension schemes a step closer to being better able to meet the ‘Big 3’ (very different, but none the less important) ‘sustainable, responsible and ethical’ client/member aims, which believe are: to better reflect personal ethical values, to make sound financial decisions by considering issues such as sustainability – and to help effect positive change by investing in well run, forward looking companies.

Today’s government response to the Law Commission’s review into ‘Pensions and Social Investment’ contains a range of comments of note that should, as a result, lead to scheme member’s also feeling a greater affinity with their schemes.

I will have to work through the information published by the DWP in more detail, but meanwhile here are the relevant links and a couple of excerpts that show stewardship and ESG are now clearly on the government agenda.

Links:

The landing page for today’s interim report is here.

Direct access to the report is available here.

The introductory text to this policy paper states the following:

“In November 2016, the government asked the Law Commission to look at how far pension funds may or should consider issues of social impact when making investment decisions.

The Law Commission’s report found there are no substantive regulatory barriers to making social impact investment by pension funds. Most of the barriers are in fact structural and behavioural, including the need for clearer legislation and guidance.

This is the government’s interim response to the report. It provides government’s first view of the Law Commission’s recommendations and areas in which it is considering taking action. It includes plans to clarify legislation around:

  • consideration of broader long term financial risks
  • pension schemes’ ability to consider members’ non-financial or ethical concerns
  • the role of engagement alongside voting as an important aspect of stewardship of pension scheme assets

A number of the Law Commission’s proposals are the responsibility of regulators. In these cases, government is working with the relevant parties as they consider the recommendations.

The Department for Digital, Culture, Media and Sport and the Department for Work and Pensions will continue to work together and with stakeholders, within government and externally, to provide a full response to the Law Commission’s report by June 2018″.

Example additional points of interest (please also see full report)

page 9

Recommendation 1  (from the earlier Law Commission Report)Regulation 2(3)(b)(vi) of the Occupational Pension Schemes (Investment) Regulations 2005 should be amended to require trustees to state their policies in relation to:(1) evaluating risks to an investment in the long term, including risks relating to sustainability arising from corporate governance or from environmental or social impact; and(2) considering and responding to members’ ethical and other concerns.

Government response (today):

“The government has agreed to consult on the following Law Commission recommendation.

It is minded to make the proposed change, by requiring that the Statement of Investment Principles must include trustees’ policy on evaluating long term risks, and any policy on consideration of members’ non-financial concerns. On the latter policy, government supports the Law Commission’s view that trustees should consider members’ ethical and other concerns, and may respond by acting on them where they have good reason to think members share the concern and it does not involve a risk of significant financial detriment.”

 

Page 15 references work that has been taking place within the jurisdiction of the FCA…

Recommendation 5  (from the earlier Law Commission Report)We recommend that the Financial Conduct Authority should issue guidance for contract-based pension providers on financial and non-financial factors, to follow the guidance given by The Pensions Regulator in its Guide on investment governance.

 

Response provided by the Financial Conduct Authority (FCA) (in today’s report)

“(36) The FCA agrees with the Law Commission that it is important to evaluate long term risks to an investment that is to be held for the long term, in particular when making investment decisions for default investment strategies and in the selection of “chosen funds” offered to members of defined contribution workplace pension schemes.”

Additional positive comments made with regard to SIP requirements and scheme governance (COBS 19.5).

Please, note these are only brief excerpts, we recommend you read the full document for a more complete understanding of this response!

And if pensions aren’t your thing this close to Christmas… I hope you enjoy our snowmen 😉

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