Public pension funds ‘underwhelmed’ by managers on ESG
UK local authority pension funds have called on asset managers to improve their performance on environmental, social and corporate governance (ESG) matters.
The Local Authority Pension Fund Forum (LAPFF) said it had gathered “disappointing feedback” from a survey of its membership, which includes 79 pension funds and five local government pension scheme asset pools.
In a report on the survey, which was carried out at the end of last year and to which 29 funds responded, LAPFF said the findings were “encouraging in one sense as managers are not heavily criticised” but that “a less generous assessment would be that they are damned with faint praise”.
“Whichever way you interpret the results, there is certainly room for improvement,” the organisation continued. “In this respect the report throws down the gauntlet for asset managers to do much more when it comes to exercising their stewardship functions.”
Overall, the LAPFF said, survey respondents were underwhelmed by their asset managers. A majority (60%) said their ESG needs were being met “somewhat well”, while just 8% gave top marks. One in five said their ESG needs were being met “very well” by managers.
The survey also found that the majority (63%) of respondents felt asset managers were “somewhat effective” at engaging with portfolio holdings “to achieve concrete and measurable change in ESG behaviours”, but only 4% gave the top score.
When asked how likely pension funds were to recommend their asset manager to another investor based on ESG performance, funds give an average “net promoter score” of 6.5 out of 10, which LAPFF said meant the funds were “close to being classed as unhappy customers”.
Almost half (45%) of respondents stated that while asset managers asserted that ESG was integral to investment processes and valuation methodologies, they provided little evidence this was the case.
At the same time, those funds who placed more weight on ESG issues were more likely to have also stated they were clearly integral to the manager’s investment processes and valuation methodologies, according to the report.
“In this respect, the weight given by funds to ESG in selection matters, as it [sic ] appears to be matched in the investment processes,” said the report.
“If it achieves nothing else, this survey should be a wake-up call for some actors in the asset manager sector that they are being judged on ESG performance and are often viewed as underperforming,” it continued.
The report was compiled by Paul Hunter of PIRC, LAPFF’s research and engagement partner.
Last week a report from the Association of Member-Nominated Trustees and UKSIF put the spotlight on the role of investment consultants in helping pension fund clients meet new ESG-related regulatory requirements, saying trustees should ensure they understood consultants’ processes for including ESG in manager selection, appointment and monitoring.