Pension fund trustees have the duty to invest to maximize returns over the long term as well as in the short term and can consider any ‘financially material’ ESG issues, the UK Law Commission says in a government-requested report.
The report, issued as a follow-up to the 2012 Kay Review that criticized investor ‘short-termism’, says ‘it would not make sense’ to say pension funds should take an ESG approach because the term is variable in definition, but that funds should take into account areas such as sustainability that may affect long-term returns.
‘Pension fund trustees do not have to maximize returns in the short term at the expense of risks over the longer term,’ the report notes. ‘We conclude that trustees should take into account factors that are financially material to the performance of an investment. Where trustees think ethical or ESG issues are financially material, they should take them into account.’
A year ago, the Kay report, written by London School of Economics professor John Kay and commissioned by Vince Cable, the UK business secretary, made a series of recommendations to encourage a longer-term vision among financial professionals and called for a review of the legal concept of fiduciary duty among pension funds, as well as other matters.
The Law Commission review says current law covering fiduciary duty and longer-term investment outlook is ‘confusing and inaccessible’ but it does not prevent trustees from taking into account non-financial information nor does it prevent them from looking at longer-term investment criteria instead of short-term criteria.
ShareAction, a group that advocates sustainable investment, called the Law Commission report ‘helpful’ but says it gives the impression that ESG investing may not be a good fit for many – or even most – pension funds.
Difficulty in measuring the impact of non-financial factors ‘risks perpetuating the belief that on balance it is safer not to have regard to these less tangible factors,’ ShareAction says in its submission to the Law Commission regarding the report. ‘We understand the commission’s concern to avoid diluting trustees’ focus on securing a pension for their beneficiaries. But the prevailing fixation on short-term financial returns has singularly failed to achieve this objective, and indeed has actively undermined it.’
