UK government to clarify fiduciary duty on ESG in response to Kay Review and Stewardship Code

The UK Business Secretary, Vince Cable, has announced that the UK government will amend existing rules around fiduciary duty to further clarify how pension trustees should address ESG factors and will also require trustees to state their policy – if any – on Stewardship, as the government’s released its progress report on the implementation of the Kay Review yesterday (October 27). Professor John Kay published his review in July 2012. It set out a radical agenda to reform UK equity markets and restore relationships of trust and confidence in the investment chain. The Law Commission’s subsequent review of ‘fiduciary duties’ commissioned by the government in response to one of Kay’s recommendations was published in July. It proposed actions for government and regulators to ensure that investors account for long-term factors such as social and environmental concerns and not just short-term financial performance. The government responded positively to all the Law Commission’s detailed recommendations in today’s progress report
The UK government intends to consult on two changes to UK pensions regulations.
The first is an amendment of the Occupational Pension Scheme (Investment) Regulations, to clarify the term “social, environmental or ethical considerations” and make a clearer distinction between financial factors and non-financial factors.
The Law Commission says financial factors are those that are relevant to trustees’ primary investment duty of balancing returns against risks. It says non-financial factors are those motivated by other concerns such as improving members’ quality of life or showing disapproval of certain industries.
The second amendment is to regulations governing the Statement of Investment Principles that requires trustees to state their policy (if any) on Stewardship.
In September, Sir Win Bischoff, Chair of UK regulator, The Financial Reporting Council, told Responsible Investor that such a rule was needed to strengthen the UK Stewardship Code, which promotes voting and corporate engagement by institutional investors.Cable said the government would convene a round table in January 2015 to consult business and investors on their views of the progress of The Stewardship Code.
Speaking about Kay’s report at an event on Monday organized by Aberdeen Asset Management and the UK Investment Management Association, Cable said the government was not asking for new rules or regulation but a change in culture. “There is evidence that is happening,” said Cable. He said the government itself had adopted a long-term approach in its Industrial Strategy similar to that recommended by Professor Kay.
Cable also said that from November 1 the UK will no longer have mandatory quarterly reporting by companies due to rule changes by the Financial Reporting Council: “It will give companies greater flexibility to focus on the long term,” he said.
He also said there were concerns that executive remuneration was not aligned with long-term incentives, but noted that this behavior was changing.
The government’s Kay Review progress report also supports a new Directive seeking to improve the quality and quantity of non-financial disclosure by listed companies, including their policies on environmental, social and diversity matters.
Cable said: “An excessively short-term, ‘quick buck’ investment culture was one of the key factors that led to the financial crash of 2008. I was determined that government should do something about it and make our equity markets better at supporting long-term value creation by British businesses.”
The Business Secretary highlighted independent research published alongside the report into the ways in which long-term investors assess company and investment performance. This research builds on Professor Kay’s analysis and makes a number of practical suggestions about how to ensure long-term investors, asset managers and companies can work together more effectively on long-term performance.
Professor John Kay said: “I am pleased with the considerable progress that has been made by the government and market participants on the implementation of my recommendations. This is by definition a long-term agenda and momentum needs to be maintained, but I am delighted in particular that the Investor Forum – one of my central recommendations – has now come into being.”