Every now and again the topic of ethical investment gets an outing in the press. Over recent years the focus has been on Local Government Pension Scheme (LGPS) funds investing in certain companies which, some commentators have suggested, are contrary to ethical investments such as tobacco companies.
Key investment questions for administering authorities
So, the Local Government Association instructed leading Counsel (Nigel Griffen QC of 11 Kings Bench Walk chambers) to advise on some key investment questions for administering authorities:
- First, did administering authorities owe any “fiduciary duties” and if so to whom did they owe those duties
- Secondly, how should an administering authority exercise its investment duties in relation to:
a) Investments which may benefit communities such as social housing or infrastructure
b) Investments which may be contrary to the benefit of society such as tobacco companies or alcohol companies.
Counsel opinion and advice
Counsel gave his opinion and he gave the following advice.
Fiduciary duties are very familiar to the trustees of occupational pension schemes and have, in fact, been in sharp focus recently as a result of Warren J’s decision in IBM Holdings & others v IBM UK Limited & Others (2014). The question has not been widely explored in relation to the public sector and Counsel found that the administering authority did owe fiduciary duties to both LGPS members and LGPS employing authorities.
However, Counsel went further and set out that even if the question of fiduciary duties was not raised, administering authorities have duties under administrative law which are analogous to the fiduciary duties (the Wednesbury principles).
In relation to the investment questions, Counsel followed on from a line of cases stretching back to the Cowan v Scargill (1984) case in the 1980s. Unsurprisingly, the press has focussed on the second limb of the opinion Counsel gave and stories along the lines “ditch the tobacco as long as you can get similar returns elsewhere”. This ignores the more nuanced parts of Counsel’s opinion, for example in relation to social housing and considerations other than “pure” returns.
Counsel, unsurprisingly comes down in favour of the decisions in Cowan v Scargill and the Harries v Church Commissioners for England (1991) supporting that the administering authorities’ key consideration when assessing investment opportunities is the return the investment can generate. However, Counsel rightly pointed out that this does not preclude other considerations being taken in to account. In fact, Counsel pointed out that regulation 12(2)(f) of the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009 requires administering authorities’ investment policies to take in to account social, environmental and ethical considerations.
Counsel’s conclusion stated that: “The administering authority’s power of investment must be exercised for investment purposes, and not for any wider purpose.”
However, he went on to say: “However, so long as that remains true, the precise choice of investment may be influenced by the wider social, ethical or environmental considerations, so long as that does not risk material financial detriment to the fund.”
If you have any questions or would like more information, please contact John Hanratty, Director.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.