Most pension funds say ethical factors crucial to returns

According to the latest Pensions and Lifetime Savings Association Stewardship Survey, 93 per cent of respondents say that environmental, social and governance factors (ESG) factors are material to investment returns - an increase of 3 per cent since last year and up more than 10 per cent since 2013.

The survey of over 60 UK pension funds with £260 billion of assets under management also revealed that 94 per cent agree pension funds have a responsibility to engage with managers and companies on ESG issues, otherwise known as stewardship.

The majority (63 per cent) of respondents say they question potential fund managers about their approach to ESG issues and stewardship as part of the selection process, and nearly half claim they include specific stewardship criteria in their proposal requests.

HEIGHTENED INTEREST IN ESG ISSUES

According to The Pensions and Lifetime Savings Association, the survey results reflect a 'heightened interest' in stewardship and ESG issues amongst investment analysts and researchers, potentially driven by recent high profile governance scandals at firms such as Volkswagen and Brazilian oil major Petrobras.

The pensions body suggests that pressure is also mounting from private investors who are beginning to take heed of research into the impact of ESG and stewardship on both society and investment returns.

Commenting on the report, Luke Hildyard, policy lead for stewardship and corporate governance at The Pensions and Lifetime Savings Association, says: 'The near universal levels of recognition of the importance of stewardship and the widespread acceptance of the principles of ESG are encouraging.

'It's perhaps a testimony to the success of initiatives such as the introduction of the Stewardship Code in 2010, the increasing body of research in this area, and shareholder activism campaigns.

'It may also suggest that, in the aftermath of the Volkswagen scandal and ongoing debates around factors such as climate risk or human capital, the profile of ESG issues is rising.'

Read more: Understanding ethical investing

NOT GETTING APPROPRIATE ADVICE

Over two thirds (68 per cent) of pension funds surveyed say they set out stewardship responsibilities in their mandates to investment managers, up from 51 per cent last year and a notable increase from just 38 per cent in 2013.

However, only 29 per cent of respondents say that their investment consultants raised stewardship issues with them in discussions, down from 30 per cent in 2014 and reflecting a widespread dearth of awareness about ESG issues among advisers.

The Pensions and Lifetime Savings Association say this suggests that some pension funds are not getting appropriate advice.

Similarly, whilst 72 per cent of pension funds say they were 'quite satisfied' with the standard of stewardship reporting from their investment managers, only 9 per cent of pension funds said they were very satisfied.

When thinking about how reporting could be improved, 55 per cent suggested that reporting should focus on integrating stewardship into more general reporting on investment performance, rather than focusing purely on returns and profitability.

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