UK’s public pension funds boosted by new ESG investment guidance

Responsible investment advocates have welcomed the government’s Local Government Pension Scheme guidance which provides a less prescriptive framework for investing as part of the requirement for local authorities to prepare their own investment strategy statement.

The guidance is to enable local authority pension schemes to meet the obligations of new regulations due to come into force next year. The investment strategy statement will need to include the authority’s assessment of the suitability of particular investments and types of investments;the authority’s policy on how social, environmental or corporate governance considerations are taken into account in the selection, non-selection, retention and realisation of investments; and the authority’s policy on the exercise of rights (including voting rights) attaching to investments.

Additionally the guidance states that assessing the suitability of different investment classes involves a number of factors ‘including, for example, performance benchmarks, appetite for risk, [the administering authority’s] policy on non-financial factors and perhaps most importantly, funding strategy.’

The government held a consultation in November last year on the proposed regulations. Responding to that consultation the UK Social Investment and Finance Association (UKSIF) had voiced concern at the apparent exclusion of reference to investment decisions based on non-financial factors and had urged caution over the apparent conflation between financially material and non-financial factors in the original consultation document. UKSIF said it welcomed both of these concerns having now been addressed in the guidance.

In a policy paper UKSIF welcomed the updated guidance which recognises the benefits to investors stemming from good stewardship and the expectation that local authority pension schemes  should sign the UK’s Stewardship Code – which it had called for in its earlier consultation response – well as the more stringent regulation which requires all authorities to have a policy which reflects their stewardship responsibilities. The guidance states that ‘engagement enables administering authorities as long-term shareholders to exert a positive influence on companies… and drive improvements in the management of environmental, social and corporate governance issues’.

UKSIF also welcomed the inclusion of a new paragraph on social investment. The guidance states, ‘in some cases, the social impact is simply in addition to the financial return; for these investments the positive social impact will always be compatible with the prudent approach. In other cases, some part of the financial return may be forgone in order to generate social impact. These investments will also be compatible with the prudent approach’ providing the two tests set out by the Law Commission are met.’

The Local Authority Pension Fund Forum (LAPFF) also welcomed the guidance. The LAPFF said that in re-establishing the need for funds to manage their ESG commitments more effectively, the guidance makes two very important new points: the requirements for funds to commit to the UK Stewardship Code which LAPFF fully supports; and the requirement for funds to have a policy on corporate governance and voting in place. This closes the door on those who have ignored their responsibilities by assuming that not having a policy is acceptable, the LAPFF said.

The Government has stated it will publish the new investment regulations later this year and administering authorities are expected to have formulated their investment strategy statements by April 1st 2017.

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