New rules force pension funds to consider environmental and social factors

Pension funds are now required to consider environmental and social factors when making investment decisions, under rules introduced today as part of the government’s bid to tackle climate change.

New rules which have come into force this morning mean all defined-contribution schemes with more than 100 members will have to set out how they are addressing environmental, social and governance factors (ESG) when investing members’ cash.

Pensions minister Guy Opperman said: “I believe that the changes coming this week will have a bigger effect on tackling climate change than almost any other decision by government.

“My colleagues in parliament tell me that pensions are not sexy, but this time it could be pension power that is the force for good to address our twenty-first century problems.”

Royal London policy director Steve Webb, who is a former Lib Dem pensions minister, said: “If you’re investing billions of pounds of people’s money in companies, you actually want to know if they’re well governed and you want to know what the environmental impact is.

“This is a small step in a long journey… But it’s pretty clear which way the tide is flowing.

“It sends a pretty clear signal to people who might think they’re not going to bother with all of this stuff.”

A joint paper between Royal London and law firm Herbert Smith Freehills last week found there is now a “growing risk” of legal challenge by the Pensions Regulator to trustees and pension providers who fail to take account of ESG factors.

Head of Pensions at law firm Herbert Smith Freehills Samantha Brown added: “ESG is no longer an optional extra for trustees, pension providers and asset managers. 

“It is essential that trustees and providers are able to demonstrate that they are taking ESG factors seriously and that they don’t just treat this as a tick-box exercise.”