UK pension funds lead the list of targets for the Impact Investing Institute next year, in the latest example of asset owners pressuring asset managers to integrate ESG factors into their decision-making process.
Launched in November in London, the Impact Investing Institute is an independent non-profit formed by a group of impact investment advocates. It believes impact investment helps pension holders reconnect with the purpose of capital while satisfying a strong desire for sustainable investments.
‘More and more people want to use their pensions and savings in a way that benefits society and the environment, as well as making a financial return,’ says institute chief executive Sarah Gordon, quoting a 2019 survey of 6,000 people by the UK government.
She also suggests pension funds are missing a major opportunity due to their size. ‘We’d like to mobilize big pools of capital, such as defined contribution pension funds, to increase their impact,’ she says.
To achieve its objective of growing impact as a vehicle for transparent, alternative investment, the organization will champion investment with the intention to improve social and environmental issues while achieving a financial return. Impact investors, the institute says, must be held accountable for performance and reporting on performance.
Prioritizing standards construction and improving reporting are key to cultivating and safeguarding impact investment against questionable claims, says Gordon. ‘Not enough of these investments have intent or accountability,’ she explains. ‘The danger of this lack of precision is one reason we’ve brought the institute into being.’
New UK and EU disclosure rules to improve pension transparency bolster the organization’s proposition. For example, new UK regulator guidance on direct-contribution pensions says statements of investment principles must include trustee policies on financially material considerations, including ESG matters such as climate change.
Nonetheless, the institute faces several obstacles. Due to fiduciary duties on pension liabilities, pension trustees have not always been receptive to innovative finance embedding ESG factors, such as impact investment.
Returns are often considered too low, difficult to scale up and illiquid due to long-term commitments – all viewpoints the institute challenges. ‘One clear benefit from impact investment is liability matching for pensions through projects such as wind farms and social housing,’ says Gordon.
To counter these views while raising confidence, the organization plans to deploy a group of pension ambassadors. ‘Some pension funds are more advanced in this area. We will translate knowledge from the pioneers in pension funds to those not yet aware,’ Gordon adds.
The institute will also build a bigger evidence base to broaden awareness on investment returns, for instance. Performance evaluations of many impact funds show a satisfactory three-year track record. But further knowledge is required on returns in the impact universe as a whole, according to Pensions for Purpose, an initiative collaborating with the institute.