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U.K. government considers broadening social impact decision-making for retirement plans

The U.K. government is considering taking action on a number of areas relating to how far retirement plans may or should consider social impact when making investment decisions.

In an interim response to a report by the U.K. Law Commission, the government outlined plans to clarify legislation about the consideration of broader long-term financial risks; retirement plans' ability to consider participants' non-financial or ethical concerns; and the role of engagement alongside proxy voting as an aspect of stewardship of retirement savings.

The Law Commission was asked by the government in November 2016 to look at how far retirement plans may or should consider social impact in making investment decisions.

"We are encouraged by its finding that there are not substantive regulatory barriers to making social impact investments," wrote Guy Opperman, minister for pensions and financial inclusion, and Tracey Crouch, minister for sport and civil society, in a foreword to the government's response. "Most of the barriers are in fact structural and behavioral, such as the need for clearer legislation and guidance on certain issues, or industry collaboration on engaging consumers."

Among the recommendations by the Law Commission was a call for changes to occupational retirement plan regulations to be amended, requiring trustees to state policies in relation to evaluating risks to an investment in the long term — including sustainability and environmental or social impact — and to consider and respond to participants' ethical and other concerns.

The government said in its response it will consult on the recommendation in full. "It is minded to make the proposed change, by requiring that the statement of investment principles must include trustees' policy on evaluating long-term risks, and any policy on consideration of members' non-financial concerns. On the latter policy, government supports the Law Commission's view that trustees should consider members' ethical and other concerns, and may respond by acting on them where they have good reason to think members share the concern and it does not involve a risk of significant financial detriment."

Another recommendation was to amend occupational plans' statement of investment principles to outline trustees' policy, if any, on stewardship, including voting and engagement. The government said it will consult on this recommendation.

The Department for Work and Pensions and the Department for Digital, Culture, Media and Sport will work together and with stakeholders — both government and external — to provide a full response to the Law Commission's report by June.

"This is good news for U.K. savers," said Will Martindale, head of policy at the Principles for Responsible Investment, in an emailed comment. "It is widely accepted that sustainability factors (or environmental, social and governance factors) help investors identify value-relevant factors that outdated financial-only analysis does not." However, Mr. Martindale said the PRI finds that many U.K. investors do not systematically integrate ESG factors through their investment processes.

"Many investors tell us that policy and regulatory effectiveness is hampered by weak implementation and inconsistency. Today's report, published by the Department for Work and Pensions, is clear. The DWP has confirmed its support for requirements for trustees to state their policies in relation to ESG issues."

Abbie Parrott contributed to this story.