Working group to 'clarify' fiduciary duty
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The government and regulators will review the framework for effective stewardship and discuss with stakeholders how to clarify trustee fiduciary duty in the context of green investing, according to an updated Green Finance Strategy published on Thursday. Elsewhere, the Treasury has opened a consultation on a future regulatory regime for environmental, social and governance ratings providers.
An updated Green Finance Strategy, titled ‘Mobilising green investment: 2023 green finance strategy’ was published on Thursday. The new version has a focus on driving private investment towards the government’s energy security, net zero and environmental objectives.
The government said it sets out a “framework for the UK to become the world’s first net zero-aligned financial centre”, as well as a framework for developing nature markets in the UK.
Pension funds, which have seen their reporting and disclosure requirements on ESG and stewardship ramped up significantly over recent years, feature prominently in the Green Finance Strategy as the government looks to channel funds towards green projects.
Among other pension-related initiatives, in the fourth quarter of this year, the Financial Reporting Council, working with the Financial Conduct Authority, the Department for Work and Pensions and the Pensions Regulator, will review the regulatory framework for effective stewardship.
“The review will assess whether the Stewardship Code is creating a market for effective stewardship and the need for any further regulation in this area,” the government said.
Fiduciary duty roundtables planned
The updated Green Finance Strategy also addresses concerns about fiduciary duty, pointing to the Law Commission’s 2014 findings about non-financial considerations.
“We recognise trustees would like to know what latitude they have,” the government said. “We acknowledge decisions around investing and systemic risks are complicated and that trustees would like further information and clarity on their fiduciary duty in the context of the transition to net zero.”
A working group of the Financial Markets and Law Committee with participants including the DWP will consider the issues around fiduciary duty and what further action is needed, and the government will be holding a series of roundtables later this year to engage with stakeholders on how it can “clarify fiduciary duty”.
DC savers’ money in focus
The government also reiterated its belief that defined contribution pension schemes are “ideal vehicles for investing in illiquid assets, such as investments in green projects".
The FCA has introduced a new open-ended fund structure that is a permitted link and requires at least 50% illiquid assets; it did so in response to government seeking ways to entice DC schemes to invest in UK real assets. The first Long-Term Asset Fund was authorised earlier this month.
The Green Finance Strategy also mentions the Treasury’s controversial decision to exclude performance fees from the DC default charge cap, claiming there had been “a positive response from the industry” and that “amended regulations will be brought into force as early as April 2023, subject to parliamentary approval”.
Should providers of ESG ratings be regulated by the FCA?
Also on Thursday, the government said ESG ratings increasingly drive investment decisions in financial markets and wants to consider bringing it into a regulatory framework under the FCA and Prudential Regulation Authority.
The government has been discussing the issue for some months. Last summer, the FCA published a feedback statement entitled ‘ESG integration in UK capital markets’, saying ESG data and rating providers should be in its remit.
“We see a clear rationale for regulatory oversight of certain ESG data and rating providers,” the FCA said at the time, noting that it favours the recommendations on ESG data and ratings developed by the International Organization of Securities Commission in 2021.
Some in the industry have previously called for more prescription in ESG ratings, which can diverge considerably.
The consultation runs until 30 June.
What is your view – is lack of clarity around fiduciary duty still a barrier to green investments?
