Expert Insights

Expert Insights

Social impact and environmental, social and governance factors in investment: pension trustees’ duties and listening to the membership

The Government is consulting on clarifying and strengthening trustees’ investment duties in relation to stewardship and consideration of members’ concerns about investments and to require pension trustees to consider and document (and in some cases make publicly available) how they consider ESG (environmental, social and governance) factors will financially affect performance when deciding on an investment strategy.


The consultation follows the Kay Review in 2012, the 2014 Law Commission report on fiduciary duties and investment and the 2017 Law Commission report on social investment in pension schemes, as well as Pension Regulator guidance in 2015.

The primary duty of trustees of occupational pension schemes is to exercise the investment power in the best financial interest of members and to secure the best return over the long term while managing risk. In doing this pension trustees should take into account all financially material factors when making investment decisions. Material factors include the impact of ESG risks on financial performance.

The current legal requirement for pension trustees when preparing a statement of investment principles (SIP) is to state the extent (if at all) they have taken into account ESG factors in their investment decisions. The Government states that this has led to “confusion and misapprehension” among trustees with some pension trustees seeing them as low priority or even running contrary to the issues of financial return.

The proposed changes to the Occupational Pension Schemes (Investment) Regulations 2005 are intended to ensure that the role of ESG factors on financial performance is properly taken into account by trustees deciding on their investment strategy and preparing their statement of investment principles (SIP).  

The proposals

 If the proposed changes go ahead, trustees of occupational pension schemes will be required by October 2019:

  • to update their existing statement of investment principles (SIP) to include a policy on the evaluation of financially material considerations that includes not only accepted risks such as interest rate risk, liquidity risk etc that have an immediate financial impact but also ESG factors which tend to have a longer term impact.  This must explicitly address climate change as a systemic risk that cuts across all issues.
  • to include a policy on stewardship in their SIP that deals with core issues of voting (shareholder activism), engaging (with both businesses and investment managers where scheme assets are held in pooled funds), and monitoring.
  • to produce a policy statement on how members’ views are taken into account when formulating an investment strategy.

In addition from October 2020, for schemes providing money purchase benefits, trustees will be required to make any updated SIP and the policy on members’ views publicly available on a website and produce an annual report on how they have implemented their strategy.  


The changes proposed by the consultation will formalise the requirement for trustees to consider ESG factors when making investment decisions (they can currently state they do not consider them) and to turn their minds to the relevance of these factors on investment performance.  For trustees of schemes providing money purchase benefits, the annual reporting and public nature of the SIP will focus attention on investment and ESG issues in particular.

The consultation expressly excludes from its scope any consideration of social impact investment (SII) which   the Social Impact Taskforce and National Advisory Board suggest is defined as “investment in the shares or loan capital of companies and enterprises that not only measure and report their wider impact on society – but also hold themselves accountable for delivering and increasing positive impact”.

The proposed changes therefore offer no guidance on the risks of implementing ESG or SII policies for pension trustees who are considering the extent to which they can take into account non-financial matters as well as financial matters in setting their investment strategy. Please see our separate briefing note on this issue.

For more information, please contact Lee Colgate, Michael Jones or Melville Rodrigues.

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