UK pension funds habitually disregard impact evaluations when making investment decisions, according to research
In a bid to meet ambitious goals like net-zero, there is a pressing need for a broader systemic change in regulation and fiduciary duty frameworks, according to Bruna Bauer, Research Manager for Pensions for Purpose. This change is crucial to ensure that systemic risks, such as climate change, are recognised as financially material [1].
A new report, 'Impact Integration: advancing reporting & management practices in pension funds', reveals that UK pension funds underuse impact reports in their investment decisions. To address this issue, Bauer suggests that pension funds should adopt recognised frameworks like the Impact Performance Reporting Norms and the Operating Principles for Impact Management. These frameworks help enhance the credibility and comparability of impact data, moving beyond superficial or "box-ticking" exercises to meaningful engagement with the content of reports [1].
Improving impact literacy among trustees and fund managers is another crucial step. A new Community Interest Group (CIG) will launch in August to improve impact literacy across the sector and align fiduciary duty with long-term goals, including net-zero. This group aims to pilot practical tools and improve understanding of impact data usage [1].
To improve reports, asset managers should go beyond selective case studies and provide a balanced view, including trade-offs and unintended outcomes. Reports should be concise, materially relevant, and link impact to financial performance, especially for funds with goals like net zero [1]. Asset managers should also balance standardisation with flexibility in impact reports, allowing space for investment-specific nuance.
To help reduce greenwashing risks, pension funds need more consistent, comparable, and evidence-based reporting from asset managers. Trustees are encouraged to scrutinise reports and demand transparency on how impact is measured and managed. This supports better risk management and more authentic impact investing outcomes [1].
Bauer highlights the importance of linking impact to financial performance in impact reports, especially for funds with goals like net zero. Trustees often struggle to assess report quality or relevance, while asset managers face challenges in collating quality data. However, by adopting standardized and credible reporting frameworks, increasing trustee and manager impact literacy, strengthening governance, and demanding more transparent, data-driven, and comparable impact reports from asset managers, UK pension funds can improve their use of impact reports to guide investment decisions and reduce greenwashing risks [1].
Asset owners backing the initiative include PGGM, Smart Pension, South Yorkshire Pensions Authority, Tyne and Wear Pension Fund, and Wiltshire Pension Fund. Bauer emphasises the need for asset managers to produce reports that help asset owners make informed decisions, not just marketing materials with another name. Managers should focus on producing reports that are critical inputs for strategic decision-making, rather than compliance exercises [1].
In summary, UK pension funds should adopt standardized and credible reporting frameworks, increase trustee and manager impact literacy, strengthen governance, and demand more transparent, data-driven, and comparable impact reports from asset managers to reduce greenwashing risks and improve the effectiveness of impact integration. This approach aligns impact reporting more closely with investment decisions, thereby improving the effectiveness of impact integration and mitigating risks associated with superficial ESG claims.
- To align investment decisions with social impact and long-term goals like net-zero, pension funds should adopt recognized frameworks such as the Impact Performance Reporting Norms and the Operating Principles for Impact Management.
- Excessive reliance on case studies, and lack of a balanced view in impact reports, including trade-offs and unintended outcomes, can hinder the credibility of fund management and investor decision-making.
- Improving impact literacy among trustees and fund managers, and strengthening governance, is crucial to ensure that impact reports are concise, materially relevant, and linked to financial performance, aiding in authentic impact investing and risk management.
