The UK’s local government pension schemes can choose to omit controversial investments such as tobacco stocks from their portfolios as long as it “does not risk material financial detriment to the fund”, according to new legal advice.
The legal opinion from Nigel Giffin QC, who was commissioned by Local Government Association on behalf of the Local Government Pension Scheme (LGPS) Shadow Scheme Advisory Board paves the way for fund members to propose divestment from tobacco stocks.
The opinion states that local government pension funds cannot ditch tobacco holdings if there would be financial disadvantage in doing so, but if a case can be made for substituting tobacco stocks for other company shares that deliver the same financial returns, there is no legal impediment to taking tobacco out.
Giffin said: “The administering authority’s power of investment must be exercised for investment purposes, and not for any wider purposes. Investment decisions must therefore be directed towards achieving a wide variety of suitable investments, and to what is best for the financial position of the fund (balancing risk and return in the normal way).
“However, so long as that remains true, the precise choice of investment may be influenced by wider social, ethical or environmental considerations, so long as that does not risk material financial detriment to the fund.”
ShareAction chief executive Catherine Howarth said the opinion from Nigel Griffin QC endorses the ethical tie-break principle. According to this principle, as long as a pension fund can show there is no financial disadvantage, the fund is free to divest from tobacco.
She added: “This opens the way for scheme members in local authority funds, to whom fiduciary duties are owed, to propose that their funds look for alternatives to tobacco that deliver the same long-term investment returns. I predict that certain health workers, who recently joined the local government pension funds, will formally request this process be undertaken. I further predict it will result in tobacco being held by fewer of the local government pension funds in future.”
The Newham Pension Fund has already removed tobacco from its portfolios.
The Law Commission is currently undertaking a review on Fiduciary Duties of Investment Intermediaries. The consultation period closed in mid-January and the final version of the report is due in June of this year.
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