The National Association of Pension Funds (NAPF) has advised the UK government against further prescribing the meaning of the term ‘fiduciary duty’ in regulation, as sustainable investment and stewardship industry groups call for stricter wording.

Responding to a Department for Work & Pensions (DWP) consultation on changes to investment regulations for pension schemes, the NAPF said further government clarification, whilst maintaining the required flexibility, would be difficult to draft.

However, socially responsible investment advocates ShareAction and UKSIF called for additional work to ensure trustees account for sustainability factors when selecting investments.

The NAPF’s response came after the DWP considered the clarifications made by the UK Law Commission on fiduciary duty to alleviate concerns it was too focused on short-term financial reward.

The Law Commission said trustees investing under fiduciary duty could take into account non-financial concerns as long as they had good reason to believe their scheme members shared their view, and the decision did not represent a significant financial risk.

The government then consulted on amending regulations regarding the clarification of ‘environmental, social or ethical considerations’ to ensure they distinguished between financial and non-financial factors.

It also questioned whether trustees should be required to state their policies on stewardship.

It its response, the NAPF said it did not see any additional benefit to clarifying fiduciary duty further or imposing an explicit duty to consider specific factors.

Will Pomroy, the NAPF’s policy lead on stewardship, said: “Such an approach would be very difficult to appropriately draft.

“It would struggle to keep pace with emerging best practice and investment trends and, indeed, impinge upon the flexibility that is currently so beneficial.

“Instead, we support efforts to catalyse further discussion at trustee board level about a scheme’s investment approach.”

However, UKSIF said the complexity of long-term, financially material factors such as ESG was the biggest threat to pension investors.

Its members demanded that the Law Commission’s findings be embedded into regulation.

Simon Howard, chief executive, said: “This must not result in box-ticking exercises. We require trustees to formulate meaningful policies on their investment strategy and approach to stewardship that enables them to take considered decisions relating to their investment portfolios.”

ShareAction, in its response, agreed with the NAPF that “codification” of the term fiduciary duty would be impractical, but it also argued that a non-binding clarification within the regulations would be reasonable.

“[The regulations] should include a provision clarifying that trustees may have regard to a wide range of factors, including ESG and non-financial considerations, when exercising their discretion on investment and stewardship decisions,” the group said.

The NAPF also said a fund’s approach should be included alongside its disclosures on how it considers financial and non-financial matters, rather than a comply-or-explain policy on trustees regarding stewardship.

It warned of the risk creating a “tick-box” exercise over meaningful engagement by asset owners.

ShareAction agreed and said a comply-or-explain approach would fail to encourage trustees to take stewardship seriously.

The group added that, if the government wished to encourage stewardship, it should reference the NAPF’s own “Principles for Stewardship Best Practice” over the “Stewardship Code”.

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