Trustees have duty to consider ‘unethical’ investments

Commentary suggesting pension funds should avoid certain investments based on members’ ethical consideration goes too far and contradicts case law, a lawyer warns.

Earlier this week ethical investment lobby group FairPensions slammed Kent County Council for investing £24m in tobacco company stock.

It said relevant considerations to this ‘unethical investment' for Kent CC could include members' ethical concerns or the cost of smoking to the taxpayer. It also said some investors still think ethical investments should be ignored over the need to maximise returns.

Allen & Overy associate Robert Tellwright agreed ethical factors are relevant in decision-making but said other factors, such as members' own ethical stance, was not.

He explained: "To suggest that pension funds should avoid certain investments on account members' ethical considerations and, in the case of Kent County Council's tobacco investments, the cost of smoking to the taxpayer, goes too far and contradicts the case law in this area.

"There is clear case law which emphasises the importance of pension funds investing in the best financial interests of members - that is, seeking to ensure appropriate returns with regard to the levels of risk involved. This is the primary legal duty."

Tellwright added if pension funds are satisfied as to the financial characteristics of two particular investments, then they can favour the investment which in their view is more ethical or socially responsible.

However, he said trustees must not dismiss the possibility of making certain investments because they consider them unethical.

"They have a duty to consider the full range of investment options available to them," he said.

Tellwright said Action on Smoking and Health's position - that declining sales of tobacco and tougher regulation - was a move convincing line of argument for ditching stocks because the sector would not remain economically stable over time.

"If pension funds receive investment advice along these lines, then it is hard to see how a decision to reduce holdings in tobacco shares could be criticised. But the decision should, first and foremost, be based on the expected investment performance of the asset."