While targeted at pension funds, the committee said its conclusions are relevant for legal advisers, investment consultants, fund managers and insurers. The guidance shouldn't be seen as favoring a particular policy direction and is instead intended to clear up legal uncertainties, it said.
"Principles and policies and making investment decisions have all become more challenging in the context of sustainability and the subject of climate change," the FMLC said. "This has given rise to renewed uncertainty over what the 'fiduciary duties' or trust duties owed by trustees of pension funds require in this context."
However, "it is proper for pension fund trustees to situate their pension fund within the wider economy," the report said. "In doing so, sustainability and the subject of climate change, can, along with other factors, be considered by pension fund trustees when seeking to achieve the purpose of the scheme."
The law committee's conclusions come amid ongoing attacks on ESG led by the Republican Party in the U.S. They argue that focusing on issues such as climate change distracts asset managers from their fiduciary duty to maximize profits for investors.
While the UK committee's findings aren't legally binding, ESG investors in the U.K. welcomed the announcement and urged authorities to incorporate them into regulation and monitoring of the financial markets.
"Our view has been that fiduciary duties need to be clarified in relation to sustainability," James Alexander, chief executive of the U.K. Sustainable Investment and Finance Association, said by email.
"This paper certainly does that," Alexander said. "However, we also think that there needs to be monitoring in the way this paper impacts the industry's interpretation of fiduciary duties, with a view to taking forward further work if necessary."
Among risks that pension funds increasingly face are legal ones, the FMLC said.
"One thing (among others) that is increasing is dispute or litigation risk in connection with businesses' and governments' response (or lack of response) to the subject of climate change," the committee said. "If it is a risk that comes with an investment it may outlast the holding of an investment."
While the conclusions arrived at in the FMLC report focused on climate change, the committee noted that it "will be apparent that the considerations may be relevant to other areas too. These may include nature, environment, community and biodiversity. In each case the lens is that of the purpose of the scheme and the proper, lawful use of trustee powers to achieve that purpose (including by reference to applicable time horizons), based on an appropriate decision-making process."