Part 2 – Is "Green" Investment Legal?

Wedlake Bell


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Most would agree the planet is endangered by climate change. Governments worldwide are taking action. None more so than the UK Government with its legislative changes...
UK Environment
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Most would agree the planet is endangered by climate change. Governments worldwide are taking action. None more so than the UK Government with its legislative changes (click here for Justin's article in this issue of Pensions Compass) and its finance initiatives described in the Government's policy paper "UK Government Green Financing" published by the Treasury on 30 June 2021 ("Green Financing Paper").

Green gilts

In the Budget the Government said it would issue a series of "Green Gilts" in 2021 being "a form of Government borrowing to finance projects with clearly defined environmental benefits". The Government anticipates a minimum of £15 billion issuance of Green Gilts in the financial year 2021-22. We understand that trustees of UK occupational pension schemes will be eligible investors. But can scheme trustees properly invest in Green Gilts and/or make other environmental investments?

The final section of the Green Financing Paper, section 5, is entitled "Green Financing and Legal Considerations" and is full of legal disclaimers.

At least Government is being upfront even if, amongst all the noise about green investing, its words strike a sobering note:
"There is currently no clear definition (legal, regulatory or otherwise) of, nor clear market concensus as to what constitutes, a "green" or "sustainable" or equivalently labelled project.".

Legal framework for scheme trustees making environmental investments

Scheme trustees will need to obtain legal and other appropriate advice on whether environmental investing is within their powers and suitable for their scheme. The law in this area is like a patchwork garment - made up of many different pieces.

Some key elements:

  • The scheme's trust deed and rules - are there any restrictions preventing environmental investment?
  • Sections 34-36, Pensions Act 1995 - need for trustees to obtain advice and be satisfied about the suitability of their investments.
  • Compliance with their Statement of Investment Principles ("SIP") and consultation with the employer on changes.
  • Compliance with the Investment Regulations, including setting out the trustees' investment policies on various matters; including in relation to:

- "financially material considerations over the appropriate time horizon",
these considerations include but are not limited to "environmental, social and governance considerations (including but not limited to climate change).".
- "the extent (if at all) to which non-financial matters are taken into account".
Non-financial matters are defined as "the views of the members and beneficiaries including (but not limited to) their ethical views in relation to social and environmental impact and present and future quality of life of the members and beneficiaries of the trust scheme".

Case law on trustees' investing

The case law is relatively thin on the ground. In one of the leading cases, the decision in Cowan v Scargill in 1984, the High Court set a high bar for investing otherwise than on purely financially considerations. But times have moved on and the The Law Commission's 2018 Report concluded that pension scheme trustees can make decisions based on non-financial factors provided that:

"(1) They have good reason to think that scheme members share the concern;
(2) There is no significant financial detriment to the fund

The case law in this area is still developing and legal advice is essential.


Putting matters at a very high level, before trustees invest environmentally (e.g. in green gilts), they will need to consider many aspects - their deeds and rules, statutory provisions, investment regulations, their SIP and the scope of the investments permitted under their investment management agreements with asset managers. Trustees will need to be satisfied green investment is financially appropriate, or is justified on the basis of nonfinancial matters (based on the correct legal tests).

A Green Gilt may initially appear unattractive financially but perhaps investment advisers will consider it financially attractive as a medium to long term investment, failing which may be non-financial reasons can come to the rescue. Trustees should consult the scheme's sponsoring employer(s) about formulating/changing the SIP content on green investing. After all, if an investment does not perform, the loss for a defined benefit
scheme falls eventually on the employer(s) responsible for
funding the scheme.

Trustees cannot exclude their duty of care in relation to investment matters (section 33 Pensions Act 1995) and the Government's fulsome legal disclaimers on page 30 of their Green Financing Framework shows how difficult "green" investing can be in legal terms.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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