ESG Consideration for Retirement Funds: Regulations and Responsibilities
ESG factors are increasingly vital for retirement fund investments, influenced by new regulations and fiduciary duties. Legal actions, state fund examples, and investment principles highlight the shift towards sustainability and long-term success.
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Presentation Transcript
ESG as an investment consideration for retirement funds David Geral, Bowman Gilfillan S.A. Tony Roda, Williams & Jensen, PLLC - U.S. Paul Williams, Baker McKenzie U.K. 2023 PENSION LAWYERS ANNUAL CONFERENCE
New U.S. DOL Regulation Fiduciary s determination must be based on factors relevant to a risk and return analysis Risk and return factors may include the economic effects of climate change and other ESG factors Whether any consideration is a risk-return factor depends on individual facts and circumstances U.S.
Lawsuit by 25 State Attorneys General The new DOL regulation jeopardizes the fiduciary duty of loyalty (exclusive benefit rule) because it allows fiduciaries substantial wiggle room and eliminates the previous regulation s recordkeeping requirement DOL is acting without specific legislative authority Regulation is arbitrary and capricious, e.g., fails to consider harm to participants/beneficiaries, more detailed justification is needed, and fails to consider sub-regulatory guidance as an alternative to a new regulation U.S.
State Fund Example From the Fund s Investment Policy: Consistent with fiduciary responsibilities the Board has an obligation to ensure that the corporations and entities in which invests strive for long- term sustainability in their operations .incorporates ESG considerations into its analysis of the riskiness of its investment decisions to the extent that ESG factors are material to the long- term success of an investment U.S.
Statement of Investment Principles must cover among other things trustees policies in relation to Financially material considerations over the time horizon of the investments includes environmental, social and governance considerations (including but not limited to climate change) which the trustees consider financially material The extent (if at all) to which non-financial matters are taken into account the views of the members including their ethical views and views relating to social and environmental impact and present and future quality of life of the members Exercise of rights (including voting rights) attaching to the investments Engagement activities in respect of the investments (including the methods by which, and circumstances under which, trustees would monitor and engage with investee entity or investment manager) U.K.
Disclosure obligations Document Where to be disclosed Which schemes Statement of investment principles On a publicly available website. On request by a member. Schemes with 100+ members Implementation statement Reports on extent to which SIP has been implemented (including description of voting by trustees) On a publicly available website. Annual report and accounts. Schemes with 100+ members TCFD report Report on extent to which TCFD recommendations have been embedded in governance activities On a publicly available website. Members must be notified of where they can view report in (i) annual report/accounts; (ii) annual funding statement (DB); (iii) annual benefit statements. Initially master trusts and schemes with >GBP5bn in assets Extended to schemes with >GBP1bn in assets No requirement (currently) for smaller schemes U.K.
South Africas Pension Funds Act supplemented by (ministerial) regulation 28: Requires trustees give appropriate consideration to any factor which may materially affect the sustainable long-term performance of fund s assets, including factors of an environmental, social and governance character Reg 28 envisages adequate risk adjusted terms suitable for the fund s specific member profile, liquidity needs and liabilities In Reg28(2)(c)(ix): Before making an investment in, and while invested in an asset, consider any factor which may materially affect the sustainable long-term performance of a fund s assets, including factors of an environmental, social and governance (ESG) character The Reg mentions responsible investment as a component of (common law) fiduciary duty
FSCA Guidance Note 1 of 2019: 4.1: In order to comply a fund should reflect its sustainability philosophy and approach, including its active ownership policy, its monitoring and evaluation methodology, and the provenance and governance of IPS itself, in the Investment Policy Statement 4.2: IPS should justify the holding of negative sustainability impact assets, and the fund s approach to remediation, or if none is intended, why not 4.3: Expect the IPS to stipulate that the above provisions translate into investment mandates 6.1: Requests reporting on the above to the FSCA and encourages trustees to communicate to members through the Board Report in the AFS 5: Encourages publication of the IPS (or an abridgement) available to members and participating employers and representative unions
S.A. Constitution Horizontal application Socio-economic fundamental rights: protection and progressive realization s9: Equality, right to equal protection and benefit of the law and protection against discrimination (race, gender, belief etc.) s10: Human dignity s11: Life s13: Slavery, servitude, forced labour s23: Fair labour practices
S.A. Constitution (continued) s24: Environment: protected, for the benefit of present and future generations s27: Healthcare, food, water and social security s28: Children: A child s best interests are of paramount importance in every matter concerning the child s32: Access to information s33: Just administrative action
