Sanya Goffe | Can doing good be bad for your pension?

Environmental, social, and governance or ESG investing has become a significant force in global financial markets. From climate-conscious portfolios to socially responsible screening, environmental, social, and governance factors influence how large sums of capital are allocated. But for pension fund trustees in Jamaica, this shift raises a critical question: Can doing good come at the expense of doing well financially?

The pensions (Superannuation Funds and Retirement Schemes) (Investment) (Amendment) Regulations mandate that trustees manage the assets of a plan prudently and in the best interests of participants and beneficiaries.

These regulations also require every pension plan to have a ‘statement of investment policies and principles’, which now requires trustees to specify the extent, if any, to which “social, environmental or governance considerations are taken into account in the selection, retention and realisation of investments”. This change opens the door to ESG considerations but also raises the bar for how they’re used.

In the 2019 UK Supreme Court decision in Cowan v Scargill, a leading case on fiduciary duty, the court ruled that trustees must act in the best financial interests of beneficiaries, even if that means investing in companies whose values might clash with personal or political views.

Justice Megarry’s oft-cited quote still resonates: The starting point is that the powers of trustees must be exercised in the best interests of the present and future beneficiaries of the trust ... the best interests are normally their best financial interests.

ESG investing is often promoted as a path to long-term sustainable returns. Advocates argue that companies with strong ESG frameworks can better handle economic shocks, environmental risks and regulatory changes. The theory is that responsible corporate behaviour leads to better performance and lower long-term risk.

But even with these potential benefits, trustees must be cautious. Trustees must never lose sight of their fundamental duty; financial outcomes must take precedence.

ESG investments aren’t automatically prudent. Fiduciary duty requires that investment decisions remain anchored in financial logic, not personal beliefs or political motivations. The principle of prudence means that ESG investments should be evaluated using the same rigorous financial analysis applied to traditional investments. Trustees who allow social or environmental goals to override financial objectives could risk breaching their legal obligations.

Globally, regulators are wrestling with the same tension. The UK Department for Work and Pensions (DWP) has clarified that pension trustees are expected to weigh ESG factors when they are financially material. This expectation is outlined in the DWP’s Guidance titled ‘Considering Social Factors in Pension Scheme Investments: Guide from the Taskforce on Social Factors’.

The Guide states, “Trustees have broad and wide-ranging powers of investment to integrate financially material ESG factors into their decisions and seek the best possible risk-adjusted returns for the duration of their investments.”

When right goes right, and wrong

Take the case of Ørsted, a Danish energy company that had rebranded itself from an oil and gas company into a renewables powerhouse: its ESG profile was central to its identity and attracted large inflows from ESG-focused investors and its share price soared. But in 2023, Ørsted lost billions in its offshore wind business in the United States due to escalating costs, supply chain disruption and rising interest rates, demonstrating that strong ESG alignment doesn’t guarantee financial success, good intentions don’t eliminate market risks, and investors, including pension funds, suffer significant losses.

In contrast, the Norwegian Government Pension Fund Global, GPFG, one of the world’s largest sovereign wealth funds, takes a more measured approach to ESG. It doesn’t chase green investments for their own sake. Instead, ESG considerations are used as a risk filter.

The fund excludes companies linked to corruption, severe environmental harm, or human rights abuses, not because of headline pressure, but because those issues pose real financial risks. This strategy helps the fund stay aligned with ethical standards without losing sight of its core objective, long-term returns. It’s a model that shows ESG can support fiduciary duty, but only when it’s grounded in material financial relevance.

The take-away here isn’t that ESG is good or bad, it’s how you use it that counts. Ørsted’s experience is a reminder that good intentions can’t shield investors from market realities. GPFG’s approach shows that you can manage ESG responsibly without putting performance at risk. For pension trustees, that distinction is critical; integrating values is fine, but only when it helps protect or grow the assets they’re entrusted to manage.

Risk-based path forward

So, how do trustees navigate this tricky terrain? By grounding ESG within a clear financial framework. That means:

• Rigorous due diligence: ask whether ESG factors affect cash flow, risk, or long-term viability;

• Materiality first: focus on ESG issues relevant to the specific investment, not general trends; and

• A returns-first mindset: avoid investments that prioritise ESG objectives at the expense of member returns.

ESG considerations can’t override the core purpose of pension funds: generating sustainable, risk-adjusted returns. Trustees are free to ‘do good’ only when it also helps them ‘do well’.

When ESG factors genuinely enhance performance, they belong in a pension portfolio. But when they don’t, trustees must walk away. Ultimately, the duty of pension fund trustees remains clear: financial prudence must always come first.

Sanya Goffe is a partner in the law firm Hart Muirhead Fatta.smgoffe@hmf.com.jm