The government has indicated it is open to the possibility of regulatory changes that would make it easier for pension funds to consider social impact when making investments.
In June, the Law Commission published a report called Pension Funds and Social Investment, which recommended that the regulations governing pension funds should be changed to set out what a fund’s trustees must consider before making a social investment.
The government’s interim response to the report, published today by the Department for Digital, Culture, Media & Sport and the Department for Work and Pensions, says the government recognises the commission’s advice that regulatory clarity would be helpful for trustees and it plans to consult on the issue.
The commission’s report concluded that the law surrounding pensions was flexible enough to allow some social investment by pension funds and that there were ostensibly no legal or regulatory barriers.
But it said it had identified "structural and behavioural barriers" to social investment, with many trustees not making the distinction between financial issues, such as return on investment, and non-financial issues, such as social impact, when deciding where to invest.
Legally, the report said, trustees could favour investments that would have positive social impact if they had good reason to think that scheme members would be concerned about the cause being invested in and the decision did not involve a risk of significant financial detriment to the fund.
It recommended that the Occupational Pension Schemes (Investment) Regulations 2005 should be amended to require trustees to explain their policies on evaluating long-term risks to an investment, including those relating to environmental or social impact, and taking members’ ethical concerns into account.
It also called for the Financial Conduct Authority to implement similar requirements for contract-based pensions and issue guidance on the financial and non-financial factors they should consider.
Today’s response from the government says: "There is evidence that trustees are not aware either of the ability to take into account non-financially material matters, or the requirement to take into account environmental, social and governance risks where there are financially material concerns."
It pledges to consult in full on the recommendation to change regulations and says it is talking to the FCA about the elements that fall into its remit.
The government response says: "The FCA welcomes the Law Commission’s report, which it sees as consistent with a number of other pieces of work it is undertaking, and is considering the Law Commission’s proposals."