Investment decisions by UK pension funds disregard environmental and social impact reports, study reveals

Investment decisions by UK pension funds disregard environmental and social impact reports, study reveals

UK Pension Funds Urged to Enhance Use of Impact Reports

A new report by Pensions for Purpose and Impact Frontiers is calling on UK pension funds to improve their use of impact reports to guide investment decisions and mitigate greenwashing risks. The report, titled 'Impact Integration: advancing reporting & management practices in pension funds', recommends several key measures to help pension funds better understand and engage with impact data.

One of the main challenges identified in the report is low confidence, limited impact literacy, and uncertainty about what constitutes useful data, which are common reasons for underutilization of impact reports. To address this, the report recommends building stronger internal understanding of impact data, especially among trustees, who currently often lack confidence and feel the level of impact literacy is just average. This involves training and education to better interpret and challenge impact information.

Another key measure is for pension funds to read and assess impact reports thoroughly, rather than partial or superficial reviews. Currently, only about 13% of UK pension funds read reports fully, and many engage with only a small part, which limits the reports’ usefulness for decision-making.

To improve the quality and credibility of impact reports, the report suggests that pension funds should adopt recognized frameworks such as the Operating Principles for Impact Management and the Impact Performance Reporting Norms. These frameworks provide guidance on data quality, relevance, and transparency, helping reduce the risk that reports become greenwashing marketing tools.

The report also encourages a culture of accountability where impact reporting informs questions, feedback, and investment decisions. Trustees should use reports not just for compliance or appearance but as a basis for ongoing dialogue with asset managers and stakeholders.

In addition, the report recommends that asset managers should balance standardization with flexibility in impact reports. Recommendations for impact reports include making them concise, materially relevant, and linking impact to financial performance, especially for funds with goals like net zero. To make reports effective, asset managers should go beyond selective case studies and provide a balanced view, including trade-offs and unintended outcomes.

The primary focus of impact reports should be to help asset owners make informed decisions, not just serve as marketing materials. To move beyond box-ticking, funds must build stronger internal understanding of impact, especially among trustees, and use reporting as a basis for questions, feedback, and accountability.

A new Community Interest Group (CIG) aimed at improving impact literacy 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 CIG aims to boost impact literacy sector-wide, supporting pension funds’ ability to utilize impact data effectively and align fiduciary duty with long-term net-zero and sustainability goals.

To meet goals like net-zero, there needs to be a broader systemic change in regulation and fiduciary duty frameworks, according to Bauer, research manager for Pensions for Purpose. Pensions for Purpose, along with ShareAction, has been advocating for systemic risks, such as climate change, to be recognized as financially material and appropriately reflected in fiduciary duty. The policy work with ShareAction highlights the need for changes in regulation and fiduciary duty frameworks to address systemic risks like climate change.

In summary, UK pension funds should invest in training to increase impact literacy, adopt standardized reporting frameworks to improve report reliability, engage deeply with impact data for decision-making, and integrate impact reporting into governance and stewardship frameworks to prevent greenwashing and deliver better social, environmental, and financial outcomes for members.

1. To ensure they are making informed decisions and avoiding greenwashing, UK pension funds are urged to invest in training to increase impact literacy, especially among trustees, and use impact reports as a basis for ongoing dialogue with asset managers and stakeholders.
2. The report suggests that UK pension funds should adopt recognized frameworks such as the Operating Principles for Impact Management and the Impact Performance Reporting Norms to improve the quality and credibility of impact reports.
3. To move beyond using impact reports primarily as marketing materials, asset managers should balance standardization with flexibility, providing a balanced view that includes trade-offs and unintended outcomes while linking impact to financial performance.

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