TPR: Trustees should be able to implement their ESG-based policies

4 December 2017

Editor

EU regulation

UK pension fund trustees who want to fulfil their fiduciary duty should be able to implement their environmental, social and governance (ESG) policies and challenge their investment advisers on these issues according to The Pensions Regulator (TPR).

The regulator issued a range of guidance, including on investment strategy, for defined contribution schemes last year and has followed this up with more guidance for defined benefit trustees. This made it clear that taking financially material ESG issues into account in their investments was part of their fiduciary duty and encouraged trustees to set out meaningful policies on long-term sustainability and how they apply the principles of the Stewardship Code. This guidance forms part of TPR's wider focus on improving scheme governance and empowering trustees to become more confident to question and challenge their investment advisers.

The Red Line Voting Initiative, launched in 2015 by the Association of Member-nominated Trustees, has been signposted by TPR within the guidance as a means to enable pension schemes to take a more active asset ownership role. However, take up of the scheme has been slow.

Amanda Latham, policy analyst at TPR, recently took part in a Pensions and Lifetime Savings Association Pensions Connection corporate governance event focusing on asset managers and ESG. This aimed to give guidance for pension funds on how they can approach this issue with their fund managers.

At the meeting, the issue of why few pension schemes were yet to adopt the Red Line Voting Initiative was raised. Speaking to Manifest after the event Latham said this is not the first time that the regulator has heard that schemes are facing problems in actually being able to enact voting policies based on ESG guidelines.

While the 2014 Law Commission report made it clear that taking ESG issues into account was not a breach of fiduciary duty for pension scheme trustees Latham said the TPR recognised that there were still barriers to asset managers actively supporting trustees to take ESG issues into account in their voting policies.

"Behavioural change takes time," she said.

The AMNT recently announced it had reached an agreement with 12 investment consultants who had agreed to highlight the guidance from the TPR that pension funds need to factor environmental, social and governance issues into their investment strategy which was seen as the latest boost to the Red Line Voting Initiative. Latham said that the Red Line Voting Initiative could be a catalyst for a conversation around ESG.

"We want strong dynamic trustees that are able to effectively execute their fiduciary duties," she said.

Separately in September, the Competitions and Markets Authority launched an investigation into the investment consultancy and fiduciary management service industry. This followed a referral from the Financial Markets Conduct Authority that identified concentrations in the market and possible conflicts of interest during its study of the asset management industry. Issues around the quality of advice on ESG issues, as well as demand side power and information issues could form part of the inquiry.

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