The DWP will consult on whether pension scheme trustees should have to report their policies on long-term investment risks involving environmental, social and governance (ESG) issues, as well as members' ethical concerns.

Responding to the Law Commission’s Pension funds and social investment report, published in June 2017, the DWP said trustees may be required to include a policy on evaluating longer-term risks, as well as a policy on consideration of members’ non-financial concerns in its Statement of Investment Principles.

The government said it was taking steps with the relevant bodies in order to implement the Law Commission's recommended policy changes and reforms.

Commenting, PLSA policy lead, stewardship and corporate governance said: “This is a welcome proposal that will make expectations of pension funds clear and align the investment regulations with other statements from the Law Commission and The Pensions Regulator.

“It is an extremely important issue and there is compelling evidence that ESG considerations have a big impact on investment returns – for example, climate change will have profound implications for many of the assets in which pension funds are invested.”

The introduction of auto-enrolment means that defined contribution schemes are expected to grow six-fold to £1.7trn by 2030, meaning schemes might benefit from taking social impact into account, as well as financial returns.

Last month, joint research by Amundi and Create found that pension plans across Europe are now displaying the “biggest investment shift” in the last decade, returning to long-term strategies, including ESG factors.

ShareAction chief executive, Catherine Howarth, said: “ShareAction has been campaigning for change in this area for years. The government’s decision to propose these reforms is a welcome breakthrough. The way pension schemes invest, and the policies they adopt, have major impacts on savers’ retirement outcomes but also on the wider world we live in.

“We urge pension savers in the UK who care about how their money is invested to let the DWP know they fully support this much needed change in the law. As powerful investors, it is essential our pension funds focus on long-term risks and opportunities such as those connected with climate change and social inequality.”

Despite this, Howarth criticised the FCA for not following the DWP in acting on the recommendations made by the Law Commission.

In its response, the government reiterated that it is working closely with the FCA in preparing its interim response, but that “the FCA welcomes the Law Commission's report” and is currently considering the role and focus of Independent Governance Committees.

The report stemmed from a request by the then Minister for Civil Society Rob Wilson MP, who asked the Law Commission to consider whether pension funds should take into account the social impact of their investment decisions, focusing on DC default funds, DC chosen funds and defined benefit schemes in-particular.

The DWP and the Department for Digital, Culture, Media and Sport are hoping to provide a full response to the Law Commission's report in the summer of 2018.

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