Responsible investment for pension scheme sponsors

Our viewpoint

“We would never invest in that type of business!”

The UN hit the headlines in 2018 when the Guardian revealed that the UN staff pension fund was investing in companies whose activities were incompatible with the UN’s core principles. Banks and Local Authorities too have been in the spotlight over public concerns that they are investing in fossil fuels.

Whatever your own personal views, your company needs to pay attention to how its pension scheme is investing. Your company may not have a strong ethical stance but public opinion can still do irrevocable damage to your brand and reputation if the company finds itself on the wrong side of an investment decision.

A simple first step for companies: check that how your pension scheme is investing is aligned with your Corporate and Social Responsibility (CSR) policies. Many companies – particularly larger ones – have clear policies on environmental standards, supply chains and sustainability. In my experience, the investments in these same companies’ pension schemes are often not consistent with the companies’ own policies. Companies should be alert to this and act where this might pose a reputational risk, threaten your ability to hire the best staff or even impact your ability to win competitive tenders.

“Hang on – don’t the trustees of the pension scheme decide on the investment strategy, so how can the company act on this?”

Well, yes, most occupational pension schemes are managed by trustees who are responsible for the investments of the pension scheme. However, the trustees have a legal obligation to consult with the company about any changes to their investment policies. This gives the company the opportunity to be proactive on this; engaging with the trustees on the company’s own policies and encouraging them to move towards your preferred responsible investment approach.

“But even if trustees agreed with the company, can they decide to exclude certain investments from their scheme?”

Guidance from the Law Commission makes it clear that trustees of pension schemes can exclude investments under certain circumstances.There are two approaches to this:

  1. The first approach is where the trustees believe the exclusions are financially justified – for example if they believe that holding these investments increases risk to the scheme or reduces expected return. This could potentially include any associated risk to the company because of the threat to the scheme’s covenant.

  2. The second approach is where the trustees have good reason to think that their scheme members have a shared view of the exclusion and there is no risk of significant financial detriment from applying that exclusion. A relatively straightforward example of this would be a decision to exclude investments in companies involved in producing controversial weapons (such as cluster munitions). Most people would agree with this type of exclusion and usually the number of companies excluded would be sufficiently small for the trustees to be comfortable that there is no risk of significant financial detriment.

Recent changes to the investment regulations for pension schemes mean that trustees need to review their policies on responsible investment ahead of October 2019. With this in mind, it is a good time for companies to engage proactively with their scheme trustees and check they are aligned with the company’s own CSR policies.

To learn more about the relevance of responsible investment to corporate sponsors, take a look at our useful summary.

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