In 2008 the Aegis Trust campaigned for an amendment to the UK Pensions Bill then going through the House of Lords which would allow corporate social responsibility concerns to be taken into account by pension fund managers and trustees when selecting investments. The amendment would have specifically permitted trustees to undertake targeted divestment from companies operating in countries where they judged the government to be complicit in genocide or crimes against humanity.
This work led to a Government statement clearly stating that pension fund trustees or managers are able to consider moral and social concerns in addition to the usual financial criteria when shaping their investment portfolio.
When arguing for engagement followed by targeted divestment from certain companies providing financial support to governments involved in crimes against humanity pension fund trustees and their advisors have sometimes argued that divestment, or actively screening out certain investments based on non-financial concerns, is unlawful under current UK law. It is certainly the case that confusion exists regarding the fiduciary duties of pension fund trustees and the legality of divestment. At present there is a perception that UK law does not provide such clarity: this inhibits pension funds from taking action. The lack of a recent test case in the UK courts or guidance from the British Government contributes to this perception.
The fiduciary duty of trustees to act for a proper purpose is being interpreted by many trustees and fund managers as a duty to maximise returns for investors, and to preclude them from having regard to any other considerations. This perception has been reinforced by the 1984 finding in Cowan v Scargill that where the purpose of a trust is to provide financial benefits, powers of investment under the trust must be exercised ‘so as to yield the best return for the beneficiaries’, taking into account the risks of the investments in question.
Subsequent developments such as Martin v The City of Edinburgh District Council  and Harries v Church Commissioners , the ‘tie-break’ principle introduced in the 1993 Pensions Law Review Committee report, and the 2004 Pensions Act give trustees some further discretion, but much depends on whether the trust deeds of a pension fund include any ethical considerations. The requirement to disclose in the Statement of Investment Principles the extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments is a positive step, but has little practical impact on trustee’s freedom of manoeuvre.
Thus in the UK trustees and asset managers are inhibited from divesting from some of the offending companies, partly through a perception that this may open them up to legal action.
The contrast with the law in the USA is stark. There, State legislatures have passed laws which provide ‘safe harbour’ to trustees wishing to divest from companies which fail to meet targeted divestment criteria. At a Federal level the Sudan Accountability and Divestment Act, amends relevant investment company law such that:
“Notwithstanding any other provision of Federal or State law, no person may bring any civil, criminal, or administrative action against any registered investment company, or any employee, officer, director, or investment adviser thereof, based solely upon the investment company divesting from, or avoiding investing in, securities issued by persons that the investment company determines, using credible information that is available to the public, conduct or have direct investments in business operations in Sudan described in section 3(d) of the Sudan Accountability and Divestment Act of 2007.”
Under modern portfolio theory, pension trustees and fund managers in the UK are advised to maximise profit and minimise risk for investors by creating a suitably diverse portfolio. Given that the Darfur divestment campaign targets less than thirty highest-offending companies, compared to the hundreds of international companies working in the oil sector in both Sudan and the wider developing world, there remains a wide range of companies which could offer an equivalent rates of return and risk profiles. Thus, it could be argued that trustees do have the ability to divest from certain companies on ethical grounds, if equivalent investments can be found. However, in the absence of clear guidance or a test case trustees are reluctant to make the first move.
The Pensions Bill was designed to set up the Personal Accounts Delivery Authority - which would have provided a personal pension plan to those without a pension, unless you opted out of the system.
Several Lords, including Lord Judd, Lord Joffe and Baroness Northover, took the lead in placing and arguing for the amendment (see right sidebar for text of amendment) which would have specifically permitted targeted divestment.
The amendment was withdrawn because the Pensions Minister made an important statement clarifying the law in this area.
Amendment No. 112ZDA seeks to give the trustee corporation the right to disinvest from investments associated with, “crimes against humanity, war crimes or genocide”.
In discussing this I should like to give some assurance on what I understand to be the current operation of the law. Noble Lords are correct that there is no such overriding right on the part of trustees. However, I have been assured that there is no reason in law why trustees cannot consider social and moral criteria in addition to their usual criteria of financial returns, security and diversification. I have already mentioned that the trustees of a scheme are obliged to cover in the scheme statement of investment principles the extent, if at all, to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments. Given that regulation 2 of the investment regulations refers to the retention and realisation of investments, we would say that those regulations would already oblige a trustee to state to what extent it makes such investments, and implicitly also why. This is an obligation on trustees, not simply a right to choose whether to disinvest or to sell such interests. Furthermore, the SIP must be reviewed at least every three years.
Apart from this statutory duty, case law also gives trustees guidance. There is no reason in law why trustees cannot consider social and moral criteria in addition to their usual criteria of financial return, security and diversification. Indeed, it has been observed by commentators in the eighth edition of the Pensions Law Handbookthat if trustees wish to make an ethically acceptable investment which will produce a financial return at least as good as that produced by any other investment, there is no reason why they cannot do so. While, strictly speaking, there may be no overriding right to divest shares held in such interests, by virtue of existing statute law, common law and the consequent combination of obligations and latitude for trustees, in our view trustees are able to act in a similar way without a specific legal right to do so.
UNEP Finance Initiative, A legal framework for the integration of environmental, social and governance issues into institutional investment, 2005
Amendment introduced in House of Lords, Pensions Bill, 10 July 2008
Government responds in House of Lords, Pensions Bill, 10 July 2008.
Amendment debated, and finally withdrawn, in House of Lords, Pensions Bill, 7 October 2008.