UK pension funds disregard environmental and social impact reports when making investment choices, according to research
In a new report titled 'Impact Integration: advancing reporting & management practices in pension funds', Pensions for Purpose and Impact Frontiers have outlined several best practices for UK pension funds to enhance their use of impact reports and address issues related to low confidence, limited impact literacy, and greenwashing risks.
According to the report, trustees often struggle to assess the quality and relevance of impact reports, while asset managers face challenges in collating quality data. The report attributes this issue to low confidence, limited impact literacy, and uncertainty about what constitutes useful data.
To address these challenges, the report recommends several steps for pension funds:
- Enhance internal impact literacy, especially among trustees. This involves building knowledge to ask meaningful questions, provide feedback, and hold investment managers accountable.
- Read and assess the relevance of existing impact reports more thoroughly. This allows impact considerations to meaningfully feed into investment decision-making.
- Adopt recognized frameworks such as the Impact Performance Reporting Norms and the Operating Principles for Impact Management. These improve the credibility, consistency, and comparability of impact reporting, helping pension funds to use impact data more effectively and reduce greenwashing risks.
- Support sector-wide efforts to improve impact literacy and alignment with fiduciary duties. The Community Interest Group (CIG) launched to boost understanding and integrate impact investment goals including net-zero targets into governance is an example of such efforts.
- Utilize robust and evolving ESG data sources and reporting frameworks. Pension funds like Devon use multiple best-in-class providers and quarterly reviews to mitigate differing data biases and improve stewardship and engagement activities.
Bruna Bauer, research manager for Pensions for Purpose, stated that to use impact reports to drive investment decisions, the first step is to read the impact reports already being received and assess their relevance. Bauer also emphasized the need for a broader systemic change in regulation and fiduciary duty frameworks to meet goals like net-zero.
In a significant development, 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. Asset owners backing the new CIG include PGGM, Smart Pension, South Yorkshire Pensions Authority, Tyne and Wear Pension Fund, and Wiltshire Pension Fund.
Other notable developments in the impact investing space include Cibus Capital co-leading a $40m robot mushroom investment and the EBRD, EIB, and SEB providing €84.8m in loans for Latvia solar projects. Export Finance Australia also provided a $100m loan to EAAIF.
As pension funds move beyond box-ticking impact reporting towards deeper integration of impact considerations in investment decisions, these steps are crucial in overcoming low confidence, limited literacy, and greenwashing challenges.
- To boost the use of blended finance in pension funds, it's essential to enhance internal impact literacy, particularly among trustees, as building knowledge enables them to ask meaningful questions, provide feedback, and hold investment managers accountable.
- In a bid to meaningfully integrate impact considerations into investment decision-making, trustees should read and assess the relevance of existing impact reports more thoroughly.
- To improve the credibility, consistency, and comparability of impact reporting and reduce greenwashing risks, pension funds are advised to adopt recognized frameworks such as the Impact Performance Reporting Norms and the Operating Principles for Impact Management.
- In the pursuit of long-term goals like net-zero, it's important for sector-wide efforts to support impact literacy and align fiduciary duties. For example, a new Community Interest Group (CIG) will launch in August to boost understanding and integrate impact investment goals into governance.
- To overcome the challenges of low confidence, limited impact literacy, and greenwashing risks as pension funds move towards deeper investment in impact considerations, utilizing robust and evolving ESG data sources and reporting frameworks is recommended.
