Understanding ESG Investment - The Legal Considerations For Pension Scheme Trustees

Pensions Senior Associate Jane McKeever writes for the Spring edition of IAPF Magazine on the legal considerations for pensions scheme trustees of integrating Environmental, Social and Corporate Governance investment factors.

Introduction

The integration of environmental, social and corporate governance ("ESG") factors into occupational pension scheme investment has become a more significant consideration for trustees in recent times.

Once the EU Directive on the activities and supervision of institutions for occupational retirement provision (the "IORP II Directive") has been transposed into Irish law, the trustees of many occupational pension schemes in Ireland will be obliged to publically disclose where ESG factors are considered in their investment decisions and how they form part of their risk management system. Despite this, there remains a high level of uncertainty about what exactly constitutes ESG investment and to what extent it is appropriate for trustees to take ESG factors into account when making investment decisions. This article seeks to clarify what is meant by ESG investment and how ESG integration interacts with trustees' fiduciary duties to members.

What is ESG investment?

A good place to start when looking at what constitutes ESG investment is appreciating, in the first instance, what ESG investment is not. The conversation around ESG investing often includes references to distinct concepts such as impact investing, socially responsible investing and ethical investing, which tend to be driven by non-financial factors, such as disapproval of certain industries. This has contributed to the misapprehension amongst some trustee groups that ESG investment involves seeking to impose the trustees' own moral principles or ethical considerations on the scheme's investment policy. A failure to understand what is meant by ESG investment means that trustees can be inclined to treat ESG factors as non-financial considerations that do not merit attention. This is not the case.

In fact, ESG investing relates to environmental, social and corporate governance issues (including those outlined in the table below) and, crucially, how these factors may affect the investment performance of a company. The value of ESG factors when setting investment policy lies in identifying ESG risks and then assessing the likelihood of these factors influencing the financial return on investments. In this respect, it has been shown that there is a...