Last week, UK Chancellor Jeremy Hunt set out government plans to get more UK savers’ pensions money invested into ‘high-growth’ companies. This is in a bid to boost the UK’s slow economic growth and, in his words, provide ‘the best possible outcomes for pension savers’. Unfortunately, these high-growth companies come in the form of private equity - meaning they are not listed on the public stock market – and they are notorious for putting profit before planet.
Hunt has ruled out formally ordering where pension funds put their money, but instead an agreement has been made by several large UK pension funds (including the likes of Aviva, Scottish Widows and Nest) to put at least 5% of their assets into these private firms. Proposals to shake up the pensions system are also high on the agenda of the Labour party, as they seek to drive economic growth in the UK whilst adhering to strict rules on public spending.
The suggestion that governments might interfere in the investment decisions of pension trustees has raised broader questions around trustees’ legal duty to invest in a way that is solely in the ‘best interest’ of savers. This legal concept – termed ‘fiduciary duty’ - has typically been interpreted in financial terms only, meaning that trustees and those who advise them usually make their investment decisions based upon maximising financial returns.
But are financial returns all it means to act in the ‘best interest’ of savers, particularly if short-term profits come at the expense of a healthy planet and society in the long run?
Pension savings should absolutely provide an adequate financial return for savers. But it’s clear that savers care about more than this. ShareAction recently commissioned a YouGov poll that revealed 73 per cent of respondents want environmental and social issues to be considered alongside profits when financial institutions they use like pension providers, banks and insurance companies are investing their money. This reaffirms existing evidence that shows savers care about more than just the bottom line. It seems obvious that acting in a saver’s best interests, and achieving the ‘best possible outcomes’, should include things like not contributing to climate change or poor working conditions, and instead helping to create a healthy future for the planet and its people.
Whilst fiduciary duty already permits, and often requires, pension funds to consider the impacts of their investment decisions on sustainability issues, the current framework remains reliant on investors interpreting these impacts as posing a ‘financial risk’. In other words, investors must believe these sustainability issues run the risk of lowering investment returns for them to consider such impacts in their decision-making.
In a framework like this, the investment industry risks forgetting its dependence on a healthy planet and society. Many of the models used to estimate the financial impacts of climate change on investment returns are drastically underestimating the effects it will actually have. For example, some models predict ‘low economic damage’ from temperature rises, but only because they completely omit the inevitable outcomes of extreme weather, sea-level rises, and wider societal impacts from migration or conflict.
These failings make a compelling case to embed a consideration of investment decisions on the wider world - taking into account the climate, biodiversity, and society alongside returns.
At ShareAction we are campaigning for exactly this, and have recently launched a new definition to clarify what ‘Responsible Investment’ should be, stating ‘Responsible Investment is a transparent approach, embedded throughout the investment process, that takes the negative and positive impacts on people and planet as seriously as financial risk and return’.
The Government needs to seize this opportunity to get the pensions industry on track to ensuring our savings are truly working in – and not against – our best interests.
The Chancellor’s announcement on increasing private equity investment arrives alongside a recently updated Green Finance Strategy, which commits the Government to reviewing fiduciary duty in the context of climate change. This presents an opportunity to tighten laws on considering a healthy climate and society in investment decision-making, moving the current ‘best interest’ view beyond finances.
ShareAction will continue to campaign for the planet and its people to be considered just as important as financial returns. Our new policy briefing sets out in more detail why now is the time to re-define ‘best interests’ in the law to reform fiduciary duty to be fit for 21st century challenges.
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