A UK-based pension trust aims to secure support from the pension minister for a review of the fiduciary duty obligations
New Legal Guidance Empowers UK Pension Funds to Invest in Green Energy and Infrastructure
A new legal guidance, developed by NatWest Cushon and Eversheds Sutherland, is set to provide greater legal certainty and empowerment for trustees to invest in green energy and infrastructure projects in the UK. This shift, announced at a Mansion House event in London on 5 March, challenges the traditional view of fiduciary duty and could significantly boost green investment in the country.
The new legal framework explicitly permits trustees to factor in environmental, social, and governance (ESG) considerations and systemic risks, including climate-related risks. This shift supports investments in low-carbon energy and resilient infrastructure that generate competitive returns and reduce portfolio volatility.
Trustees now have greater discretion and confidence to invest in UK-based projects like clean energy and infrastructure. The legal blockers that previously limited their focus to short-term financial returns are being lifted, allowing them to consider factors that are important to pension members, such as long-term value, systemic risks, and the economy-wide effects of investments.
The new legal advice complements ongoing pension reform incentives encouraging domestic investment, particularly in undercapitalized sectors like clean energy. This is viewed as key to reviving UK growth and making pension capital productive for both returns and societal benefit.
By recognizing the financial materiality of systemic risks and requiring fiduciaries to manage these, pension funds are more likely to integrate climate risk and impact into their investment decisions. This improvement in transparency and the quality of ESG reporting is expected to benefit pension members and support sustainable economic development.
The evolving legal advice and reforms mark a move from a restrictive interpretation of fiduciary duty to a more progressive, enabling framework that facilitates productive, responsible investment in UK green energy and infrastructure. This shift could support the UK government's growth and decarbonisation agenda, potentially channeling billions into renewable energy, low-carbon transport, and industrial decarbonisation projects.
Michael Jones, partner and head of defined contribution pensions at Eversheds Sutherland, emphasized that trustees must balance financial and non-financial factors carefully and justify their investment decisions in line with Section 36 investment advice requirements. Trustees still need to ensure they meet long-term return expectations and take their own professional advice to ensure the robustness of the investment case.
Experts caution that trustees must conduct thorough due diligence before making investment decisions, even with the more permissive legal framework. Julius Pursaill, strategic adviser at NatWest Cushon, stated that trustees have been at a disadvantage when allocating capital in various regions, and the new legal opinion allows them to focus on creating societal infrastructure in the UK.
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 guidance is significant for the UK's energy transition, as it could boost green investment in the country and align pension investments with both financial returns and positive societal/environmental impact.
[1] NatWest Cushon and Eversheds Sutherland, "New Guidance Clarifies Fiduciary Duty for UK Pension Funds," 5 March 2023. [2] The Pensions Regulator, "Climate Change: Guidance for Trustees," 2021. [3] UK Government, "Green Finance Strategy," 2021. [4] HM Treasury, "Pension Schemes Act 2021," 2021. [5] Financial Conduct Authority, "ESG Integration: A Guide for Asset Managers, Life Insurers and Fiduciary Managers," 2020.
- The new legal guidance empowers UK pension funds to invest not only in green energy and infrastructure, but also in other sectors such as finance, real-estate, and even industries that focus on sustainability and low-carbon projects.
- With the evolving legal framework, UK pension funds are now encouraged to consider factors like long-term value, systemic risks, and the economy-wide effects of investments, which may lead to more industrious investment in energy-efficient businesses and beyond.
- The shift in legal guidance is expected togenerate a surge in capital allocation towards environmental, social, and governance (ESG)-focused investment, potentially driving finance and economic growth in various sectors, including energy, business, and real estate.
