Some UK pension trustees would like to adopt a “net zero” investment strategy. Does the law allow this?

Last year’s Climate Change Regulations, and this year’s hot summer, have prompted pension trustees to think more about climate change and greenhouse gas emissions. Some trustees would like to adopt a “net zero” investment strategy. They’ve asked us: Does the law allow this?

The short answer is “yes” – so long as you follow the normal rules for making trustee decisions. For investment decisions, this means that you must reasonably believe that the decision is:

• in the best interests of members and beneficiaries; and

• consistent with the purposes for which the employer set up the scheme.

The duty to invest in “the best interests of members and beneficiaries” is in overriding regulations, and “interests” are not limited to “financial”. We think trustees can reasonably conclude that the “interests” of most members and beneficiaries include the continuation of human life on earth in a congenial environment (and not just for their own lifetime).

The regulations also anticipate that pension trustees may consider “the views of the members and beneficiaries including (but not limited to) their ethical views and their views in relation to social and environmental impact and present and future quality of life”. The trustees’ statement of investment principles must include their policy on taking account of these matters.

The duty to consider the purposes of the scheme is part of general trust law. Some people have difficulty in defining the purpose of a pension scheme but we think it pretty obvious: employers set up schemes “to attract and retain workers for the benefit of their business”. Why else?

Of course, the pension is the main attraction for workers and providing pensions cost effectively is important for the employer. However, consumers, investors and workers prefer to shop, invest or work for businesses that share their “values”, especially on social and environmental issues. Support from these stakeholders is likely to have financial benefits for the business and the scheme. Pension trustees need to consider how their investment strategy may influence these stakeholders.

In 1992, a Court said this about how trustees should invest:

“The idea that the purposes of the trust will be best served by investing to obtain the maximum return consistent with commercial prudence is usually the best starting point – but not necessarily the right end point.”

This statement was affirmed in another case earlier this year. In Butler-Sloss v Charity Commission (2022), the judge authorised charity trustees to follow a “net zero” investment strategy, saying:

“In considering the financial effect of making or excluding certain investments, the trustees can take into account the risk of losing support from donors and damage to the reputation of the charity generally and in particular among its beneficiaries.”

These cases involved charities but the same principles apply to pension schemes. The above statement requires hardly any modification for pension trustees:

“In considering the financial effect of making or excluding certain investments, the trustees can take into account the risk of losing support from the employer and damage to the reputation of the employer generally and in particular among its members and employees.”