Law Commission looking at social investment by pension funds

UK government launches investigation to bring it into the mainstream

The UK government has asked the Law Commission, the country’s independent statutory body which reviews UK law, to look at social investment by pension funds, in a bid to help mainstream the activity.

It’s the latest move in the UK to develop or encourage social investment, or impact investment, by the country’s pension funds. Last month, a taskforce on ‘social pensions’ was announced involving organisations like UK social investor Big Society Capital, Hermes Investment Management and ShareAction. And in September the government released guidance for the UK’s local government pension schemes (LGPS) that included a new provision that pension funds must explain their approach to social investment and the extent to which non-financial factors are considered in their investment process.

And now the Minister for Civil Society, Rob Wilson, has asked the Law Commission to look at social investment by pension funds, asking the body to investigate how far does or should the law allow pension funds to select an investment because it is thought that it would make a positive social impact.

He also wants the Law Commission to provide an accessible account of the law in this area, and to consider the legal or regulatory barriers to social investment.

Wilson said in a statement to RI: “This is an important piece of work by the Law Commission which should contribute to mainstreaming social investment through investment of capital by pension schemes. The right social impact investments can fit the return profile needed by pensions as well as delivering positive outcomes for society.”

The Law Commission has already explored the issue of social investment by charities, which led to a change in law last year with the government introducing a statutory power allowing charities to invest for lower financial return or higher risk where this advances the purpose of the charity.Its new work on social investment by pension funds will build on the Law Commission’s previous work on fiduciary duties. In 2014, the Law Commission found that where trustees think ethical or ESG issues are relevant to risks of the investment, they should take them into account. The UK government did not take its recommendations forward in law.

“This is an important piece of work by the Law Commission”

Social investor Big Society Capital has welcomed the move. Simon Rowell, Strategy & Market Development Director, said: “The call can help us understand why we see so many pension savers interested in investing in pensions that match their values, yet so few social pension products developed.”

The move has also been welcomed by law firm BWB which helped encourage the government to introduce a statutory power for social investment for charities.

Luke Fletcher, Partner and the Head of Social Ventures and Social Finance at BWB, said: “My hope is that the Law Commission takes a wide view of the pensions system as a whole and exercises some imagination about how we could develop a system which enables consumers to choose positive pension investment plans. I think this means looking not primarily at the duties of trustees but, far more importantly, at the ways in which investment mandates are framed – as this is what shapes trustee duties.”

He continued: “I think this means making sure that advisers and intermediaries are actively seeking out clients wishes when it comes to impact investing….the impression I get is that the non-financial impacts of investments are often overlooked and I think a lot of people would be angry if this was explained to them.” Link