Investment choices by UK pension funds often disregard impact reports, according to a new study
In a recent report titled 'Impact Integration: advancing reporting & management practices in pension funds', Pensions for Purpose and Impact Frontiers have called for UK pension funds to improve the use of impact reports. The report emphasises the need for pension fund trustees to read and assess impact reports thoroughly, build stronger internal understanding of impact, and utilise these reports actively for questions, feedback, and accountability.
Bruna Bauer, research manager for Pensions for Purpose, stated that pension funds should read impact reports and assess their relevance to move beyond box-ticking. The report identifies low confidence, limited impact literacy, and uncertainty about what constitutes useful data as reasons for this underutilization.
To support the sector in improving impact literacy, a new Community Interest Group (CIG) is set to launch in August. Asset owners backing the new CIG include PGGM, Smart Pension, South Yorkshire Pensions Authority, Tyne and Wear Pension Fund, and Wiltshire Pension Fund.
The report recommends the adoption of established impact reporting frameworks such as the Impact Performance Reporting Norms and the Operating Principles for Impact Management to enhance report credibility and usability. These frameworks aim to provide a standardised approach to impact reporting, ensuring that reports are concise, materially relevant, and link impact to financial performance.
Bauer also suggests that asset managers should balance standardization with flexibility in impact reports, using shared metrics where possible but allowing for investment-specific nuance. She emphasises the need for asset managers to go beyond selective case studies and provide a balanced view, including trade-offs and unintended outcomes.
Moreover, the report stresses the importance of aligning fiduciary duty with long-term objectives like net-zero. To meet these goals, there needs to be a broader systemic change in regulation and fiduciary duty frameworks, according to Bauer. She advocates for the recognition of systemic risks like climate change as financially material and appropriately reflected in fiduciary duty.
In summary, the report calls for UK pension funds to transform impact reporting from a peripheral exercise into a core part of investment governance that supports sustainable outcomes consistent with trustees’ fiduciary responsibilities. The recommendations aim to help trustees and asset managers become more confident in discerning quality impact data and integrating it into investment decision-making processes, ultimately supporting the move towards net-zero targets.
[1] For more information on the Community Interest Group (CIG), visit CIG website.
- To enhance impact literacy in the sector, pension funds can consider investing in blended finance, which combines both traditional and impact investing, when evaluating their energy transition strategies through the use of impact reports.
- As part of personal-finance management, individuals can align their business investments with sustainable outcomes by advocating for pension funds to improve their use of impact reports, as proposed in the 'Impact Integration' report.
- Incorporating impact reporting frameworks such as the Impact Performance Reporting Norms and the Operating Principles for Impact Management into pensions and business operations can provide a clearer picture of financial performance, helping pensions to make informed decisions about investing in energy transition projects.
