Have you seen the news? Members are getting powers to hold trustees to account over their consideration of environmental, social and governance (ESG) factors when setting the investment strategy. Now, that is a scoop! But is it true?

In its consultation on clarifying and strengthening trustees’ investment duties, DWP is at pains to make clear that the new regulations do not, in fact, require trustees to invest in line with member views. Trustees will have to prepare a statement explaining ‘the extent to which’ member views will be taken into account for the purposes of the statement of investment principles (SIP), meaning trustees will remain able to ignore or decline to seek member views. The current legal position in that respect will remain untouched. There is a danger that trustees may not appreciate this.

To do otherwise would result in a seismic shift in the role of a trustee- someone trusted to act in the interests of others and held to account if they don’t. An obligation to canvass member views would both undermine that role and risk leaving trustees hamstrung by conflicting and possibly ill-informed (if well-intentioned) views. It makes even less sense for DB schemes where it’s the employer that bears the financial risk. So what powers are members getting?

The proposals give members the power of information. Schemes with DC benefits (other than AVCs) will have to publish the statement about members’ views, and explain how it has been implemented, on a website. This is similar to the new costs and charges disclosure requirements. So in theory DC members will be able to compare their scheme within the market. And all schemes will remain obliged to provide members with the SIP on request. It doesn’t look like the SIP must contain the statement about member views, but it will need to include a policy on ‘financially material considerations‘. The idea being to disentangle the current confusion around when ESG and ethical and social impact matters need to be considered. The draft regulations say that financially material considerations include ESG matters but DWP has admitted that this may not always be the case.

Yet context will be key. Choice is positive and a member may prefer a fund that aligns with his or her social or ethical views in priority to larger returns. However, information must be given against the backdrop of the trustee duty to invest in members’ financial interests and the scheme’s offering. Members must not be misled into thinking that their views ‘must be taken into account. At best this could result in time consuming exchanges with members and at worst members may make unwise transfers. DC master trusts may have a head start dealing with this, given they currently must generally encourage members to share views.

The potential to confuse members and trustees is real. Scheme returns, and social investment strategy as a whole, may quickly reap the rewards if disengaged trustees become aware of ESG risks and opportunities that were previously ignored. But time will tell whether it’s another box-ticking exercise.

Anna Copestake, Partner
This article was published in Pensions Insight