UK pension master trust pursues endorsement from minister for pension affairs to conduct a review of fiduciary responsibilities
The UK's Financial Markets Law Committee (FMLC) issued a landmark paper last year, defining climate change as a financially material risk. This new guidance is significant for pension funds' role in the UK's energy transition, particularly in light of NatWest Cushion's pledge to invest 5% of its default fund in private markets, making it one of the first DC investors in climate solutions.
The new guidance, developed in collaboration with Eversheds Sutherland, confirms that UK pension trustees can legally consider factors beyond traditional financial returns when making investment decisions. This legal interpretation of fiduciary duty, as clarified by recent Supreme Court rulings, emphasizes a strict duty of single-minded loyalty and prohibits fiduciaries from benefiting personally without fully informed consent from their principals.
This enhanced fiduciary clarity encourages pension funds to adopt a long-term investment perspective, aligned with beneficiaries' interests. This shift supports investments in less liquid, productive real assets such as infrastructure and clean energy projects. Such investments offer potential returns accompanied by an illiquidity premium and align with the UK government's goals for economic recovery and decarbonisation.
The new interpretation stresses the importance of transparency and informed consent. Pension funds must rigorously assess and disclose potential conflicts and benefits when investing in complex infrastructure or industrial decarbonisation projects. This could result in more thorough governance and stewardship practices under the UK Stewardship Code 2026, which explicitly acknowledges fiduciary duty includes considering environmental and societal impacts relevant to beneficiaries.
The impact on pension funds’ investment in UK infrastructure, clean energy, and industrial decarbonisation is twofold. Firstly, the stronger fiduciary duty interpretation reinforces the need for careful due diligence, loyalty, and full disclosure, enhancing governance standards in these investments. Secondly, it supports increased allocation toward long-term, illiquid productive assets such as infrastructure and clean energy, in line with government policy goals and the pursuit of sustainable, decarbonised economic growth.
This combined legal and policy environment creates a more disciplined but supportive framework for pension funds investing in sustainable UK infrastructure and decarbonisation projects. Even a small reallocation of capital towards green investment by pension schemes, collectively managing £3 trillion in assets, could significantly accelerate the UK's transition to net zero.
The new legal advice challenges the notion that pension funds must take a narrow view of risk-adjusted financial returns. Instead, it provides a legal framework for trustees to consider the long-term impact of investments on members' retirement, including access to clean energy, healthcare, infrastructure, and a strong economy.
Pensions minister Torsten Bell, who was appointed in January, welcomed the findings, stating that trustees have a fiduciary duty to secure good outcomes for members, which supports investing in a broad range of assets and investing in the UK. Michael Jones, partner and head of defined contribution pensions at Eversheds Sutherland, emphasized that the law allows for a wider and more holistic view of sustainability, but trustees still need to take their own professional advice and be satisfied with the robustness of the investment case.
The shift in investment could support the UK government's growth and decarbonisation agenda, encouraging pension funds to channel billions into renewable energy, low-carbon transport, and industrial decarbonisation projects. The announcement was made at a Mansion House event in London on 5 March.
[1] FMLC (2021). Climate change as a financially material risk: A guide for UK pension funds. [online] Available at: https://www.fmlc.org.uk/wp-content/uploads/2021/03/FMLC-Climate-change-as-a-financially-material-risk-A-guide-for-UK-pension-funds.pdf [2] HM Treasury (2020). Green Finance Strategy. [online] Available at: https://www.gov.uk/government/publications/green-finance-strategy/green-finance-strategy--2 [3] The Law Society (2021). Pension trustees can consider ESG factors in investment decisions, new legal opinion confirms. [online] Available at: https://www.lawsociety.org.uk/news/press-releases/pension-trustees-can-consider-esg-factors-in-investment-decisions-new-legal-opinion-confirms/ [4] The Pensions Regulator (2020). UK Stewardship Code 2020. [online] Available at: https://www.thepensionsregulator.gov.uk/-/media/project/resource/the-pensions-regulator/documents/codes/stewardship-code/uk-stewardship-code---2020.pdf
- The UK Financial Markets Law Committee's guidance on climate change as a financially material risk has opened up new possibilities for pension trustees, as they can now legally consider factors beyond traditional financial returns when making investment decisions.
- This legal interpretation of fiduciary duty could lead to an increase in allocation towards long-term, illiquid productive assets such as infrastructure and clean energy projects, which align with the UK government’s goals for economic recovery and decarbonisation.
- The enhanced focus on environmental and societal impacts, as well as transparency and informed consent, could prompt pension funds to channel billions into renewable energy, low-carbon transport, and industrial decarbonisation projects, supporting the UK government’s growth and decarbonisation agenda.
