Fund managers are currently only offering clients an underdeveloped responsible investment (RI) reporting framework and must improve how they assess the social impact of investments, according to a coalition of UK pension funds.
Over a dozen schemes with £200bn (€267bn) in assets – including the BT Pension Scheme (BTPS), Universities Superannuation Scheme and Pension Protection Fund – argued that improved reporting and disclosure on public equity investments would help asset owners better assess how well RI matters were aligned with the fund manager’s strategy.
It identified two main principles – of transparent integration of environmental, social and governance (ESG) factors and of good stewardship – as key, and added that only “explicit” reporting would allow schemes to gain a better understanding of how such issues impacted short and long-term risk and performance.
Daniel Ingram, the guide’s lead author and head of RI at BT Pension Scheme Management, told IPE reporting was the “missing link” to allow asset owners to make the case for ESG-focused investment.
He said it was important fund managers offered explanations of how they approached their portfolio, noting that it would allow a manager to argue that ESG was not “material” to certain firms’ value or growth.
“We would really welcome that type of candid conversation, and we are interested in the insight the portfolio managers have,” Ingram said.
“We are happy for them to demonstrate that they’ve really gone through a process of introspection, of reflection, around what is responsible investment for their portfolio.”
Leanne Clements, one of the guide’s deputy editors and responsible investment officer at the £10bn West Midlands Pension Fund, said that, in the fund’s view, there was a need for “broad improvements” in reporting across the fund management industry.
“This is what makes that alignment of UK asset owners totalling over £200bn so important – we need to send a signal to the market, not just select individual managers,” she said.
“There has been some positive direction of travel with regards to climate change and other environmental issues in select managers – and also governance issues. However, social issues appear to be less understood.”
Alongside Clements, the Environment Agency Pension Fund’s chief responsible investment and risk officer Faith Ward, and Karianne Lancee, sustainability manager at the Unilever UK pension fund, also acted as deputy editors of the guide.
Its release was welcomed by the Financial Reporting Council (FRC), the regulator responsible for the UK Stewardship Code, and the BTPS-owned Hermes Investment Management.
David Styles, the FRC’s director of corporate governance, said it would provide a “useful framework” for discussion between asset owners and managers.
“The FRC welcomes this initiative to increase the level of accountability through the investment chain and encourages owners and managers to work together to improve the standard of reporting on responsible investment,” he said.
Hermes chief executive Saker Nusseibeh added that companies with strong governance and “astute” management of ESG risks – including emissions controls and labour rights – provided better long-term value.