UK pension trust seeks minister's support for review of duty concerning responsible investment decisions
UK Pension Funds to Boost Green Investment Following Legal Shift
In a significant move for the UK's energy transition, a new legal interpretation of fiduciary duty for UK pension funds has been announced. This change could lead to increased investment in green and sustainable projects, unlocking billions for renewable energy, low-carbon transport, and industrial decarbonisation projects.
The new interpretation clarifies and expands pension trustees’ responsibilities beyond narrow financial returns to explicitly include broader economic, environmental, and social interests of beneficiaries. This enables pension funds to invest more confidently in sustainable, low-carbon, and innovative assets that support the UK’s long-term economic development, climate goals, and a just transition.
Previously, outdated laws had limited trustees to consider only financial performance, restricting investment in green technologies and infrastructure. The proposed clarification or statutory amendment to fiduciary duties would remove these legal blockers, giving trustees legal comfort and discretion to incorporate climate risks and sustainability factors as core components of their decision-making.
This shift aligns with government and regulatory initiatives aimed at consolidating pension schemes and driving long-term value creation through sustainable investment. It also recognizes systemic risks and the importance of local economic impacts and social outcomes in pension fund management.
The new interpretation promotes the integration of sustainability and climate considerations as part of fiduciary duty, empowers trustees to invest in green/low-carbon assets supporting energy transition, encourages UK-focused productive investments, reduces legal uncertainty, and aligns pensions with systemic risk management and resilient, sustainable economic growth.
Pension minister Torsten Bell, who spent nearly a decade as chief executive of the think tank Resolution Foundation before taking on his current role in January 2023, welcomed the findings. He stated that trustees have a fiduciary duty to secure good outcomes for members, which supports the case for investing in a broad range of assets and for investing in the UK.
NatWest Cushon, which has been one of the first DC investors in climate solutions, has pledged to invest 5% of its default fund in private markets as part of the Mansion House Pledge. The new guidance developed by NatWest Cushon and Eversheds Sutherland confirms that UK pension trustees can legally consider factors beyond traditional financial returns when making investment decisions.
However, trustees must still balance financial and non-financial factors carefully, conduct thorough due diligence before making investment decisions, and justify their decisions in line with Section 36 investment advice requirements and meet long-term return expectations.
The announcement was made at a Mansion House event in London on 5 March 2023. The new legal opinion may encourage pension funds to invest more confidently in the UK’s energy transition rather than overseas projects, according to NatWest Cushon.
This shift in investment could support the UK government’s growth and decarbonisation agenda, potentially channeling billions into renewable energy, low-carbon transport, and industrial decarbonisation projects. With pension schemes collectively managing £3trn in assets, a small reallocation of capital towards green investment could significantly accelerate the UK’s transition to net zero.
- The new legal interpretation of fiduciary duty for UK pension funds could lead to increased investing in renewable energy, low-carbon transport, and industrial decarbonisation projects, as it expands the responsibilities of pension trustees beyond traditional financial returns to include broader economic, environmental, and social interests.
- Pension funds in the UK are now enabled to invest more confidently in sustainable, low-carbon, and innovative assets due to the new legal interpretation, which aligns them with the government's climate goals and the bustling environmental-science sector.
- The announcement encourages UK-focused productive investments, as trustees are now empowered to consider factors beyond traditional financial returns when making decisions, which also includes climate risks and sustainability factors.
- The new interpretation of fiduciary duty could result in a portion of the £3trn assets managed by pension schemes being re-allocated towards green investment, thus significantly accelerating the UK’s transition to net zero emission through renewable energy and other green projects.
- Businesses involved in real-estate, finance, and the renewable energy industry may see an increased demand for their products and services, as a result of the new legal shift promoting investment in sustainable assets that support the UK’s energy transition.
