Government Response To Social Investing And Esg

11 April 2018


  • In November 2016, the UK Government requested that the Law Commission consider how UK pension schemes should assess issues of social impact when making investment related decisions.
  • The terms of reference included both defined benefit and defined contribution pensions schemes.
  • It requested details of potential legal or regulatory barriers to using pension funds for social impact.
  • In June 2017, the Law Commission published its report “Pension Funds and Social Investment”.
  • In December 2017, the UK Government published “Pension funds and social investment: the government’s interim response”.
  • Government is expected to consult on revised regulations in the Summer of 2018.


Law Commission Conclusions

The Law Commission identified barriers to social investing that were structural and behavioural rather than legal or regulatory. Specifically, it was recognised that there is confusion over the terms such as ’ethics’ and ‘ESG’ (Environment, Social and Governance). At the heart of this is the requirement that a scheme’s Statement of Investment Principles (SIP) includes a statement of the trustees’ policy on:

“..the extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments.”

JLT comment: We believe that removing potential behavioural barriers should be welcomed provided that it results in better understanding of any underlying risks. It is our experience that this confusion exists and that the current focus on the long term sustainability of investments will significantly reduce this confusion.

Law Commission Recommendations

To address current barriers, the Law Commission recommends the following changes to the Occupational Pension Schemes (Investment) Regulations 2005:

  • There should be a clear distinction between financial factors and non-financial factors;
  • The SIP should include the trustees’ policy (if any) on stewardship.

The UK Government said it welcomes the recommended changes to the investment regulations and is minded to make the proposed changes, subject to full consultation.

JLT Comment: When providing evidence to the Law Commission, the UK Sustainable Investment and Finance Association (UKSIF) expressed the view that the terms “financially material factors” and “non-financial factors” would be particularly helpful to trustees. At JLT we support this view and believe that trustees must ALWAYS take into account financially material factors when considering investments. Given the long-term nature of investments, risks impacting sustainability of investment returns should be taken into account. As ESG risks are a fundamental part of the long term risk profile of investments, taking them into account can help in the implementation of a better risk adjusted investment strategy.

3. Infrastructure Investment

The Law Commission notes in its report that property and infrastructure investments are widely recognised as providing social impact and financial return. Specifically, investment in infrastructure projects can involve social housing, care home and hospital facilities. It identified a number of structural barriers to DC funds investing in this area, including liquidity (requirement to process transactions quickly) and daily pricing of investments (used by investment platforms).

The Law Commission suggested that the Financial Conduct Authority (FCA) should consider providing guidance about how pension schemes can manage some element of illiquid investment within their funds and how they can produce unit prices for illiquid assets.

In response, the FCA issued a discussion paper in January 2017, entitled “Illiquid Assets and open-ended investment funds”. The closing date for responses was 8 May 2017 and the FCA will now consider any changes to existing rules and guidance when assessing feedback to the discussion paper. However, it was noted any potential changes would need to be considered in conjunction with the Prudential Regulation Authority (PRA).

JLT Comment: In our experience the minimum investment required in infrastructure funds is a barrier to pension schemes investing in this asset class. For Local Authority pension funds, where assets are being pooled, this barrier has been removed. Similarly, enabling private sector pension schemes to overcome their current structural barriers will help them to use investment platforms to access direct infrastructure investments and should be welcomed.


The Institute and Faculty of Actuaries issued a risk alert to its members in May 2017. The alert said that actuaries should consider how climate-related risks affect the advice they provide, including:

  • the potential implications of climate-related risks on invested assets;
  • changing temperatures and disease on mortality rates; and
  • any potential impact on employer covenant.

The implication of this is that climate change (the E in ESG) should now form part of a scheme’s integrated risk management framework.


This interim response is the latest in a series of papers from the UK Government on the subject of social investment including:

  • Growing a Culture of Social Impact Investing in the UK (November 2017); and
  • The Rise of Impact (five steps towards an inclusive and sustainable economy) (October 2017).

Requiring private sector pension schemes to examine long term investment in sustainable terms reflects our experiences in the Local Authority sector and has our full support.

Proposals that help reduce liquidity and technical barriers to asset classes that can improve the risk/reward profile of all pension schemes and pension arrangements has our backing. We will provide advice on the regulations and guidance when they are published.

To discuss how best to benefit from a review of ESG factors please contact Nick Buckland on 020 7528 4188 ( or John Paterson on 0131 203 2864 (, or get in touch with your usual JLT Investment Consultant.