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Research: Impact strategies compatible with pension funds’ fiduciary duty

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Published: 7 December 2023

Impact investments achieve returns comparable to the wider market, making them compatible with the fiduciary duty of pension funds to their stakeholders, a Pensions for Purpose research paper concludes.

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The report’s findings could unlock “billions of euros” of potential impact investments | Photo by Karsten Wurth on Unsplash

UK Pension funds’ fiduciary duty does not conflict with their ability to develop impact investment strategies, as these can realise similar returns to investments in the wider market, according to new research by Pensions for Purpose.

The report “dispels the myth” that impact investments necessitate a trade-off with financial returns, the UK-based industry body said. It describes this as “a significant revelation for trustees across the UK who may have had concerns their fiduciary duty is a bar to investing in positive impact investments”. 

Such concerns are regarded as a major obstacle to unlocking billions of euros worth of impact investment that could flow from pension funds, if they were convinced that those investments do not run counter to their fiduciary duty to their own pension holders, which has traditionally leaned towards maximising financial returns. 

In the report – Impact investment performance : a UK asset owner & investment consultant perspective – Pensions for Purpose produces findings based on data acquired from 17 asset managers with UK pension fund clients, based in either Europe or the US, that manage £18.6bn of impact assets. It also talked to six UK pension funds and four investment consultants to gain qualitative insights.

‘Far-reaching consequences’

It looks at data for impact funds investing via listed equity, bonds, private equity, real estate and infrastructure, comparing their performance with those of relevant investment indices.

While most financial markets have been volatile over recent years, the authors found that impact funds performed comparably or better than relevant FTSE market indices.

“The findings validate the compatibility of impact investing with financial performance goals which could have far-reaching consequences on future institutional investments,” said Karen Shackleton, Pension for Purpose’s chair.

She said the data showed the potential of impact investment to contribute positively to society and the environment while meeting fiduciary obligations, and that she hoped the report would provide a valuable resource for pension funds thinking of adopting impact investing strategies.

Shorter history

Pensions for Purpose did note that some asset owners with a shorter history in impact investing expressed less satisfaction with their returns than those with a longer track record, but said that these investors acknowledged the need for a full market cycle to fully assess performance. 

The main themes for the impact investments analysed in the report were renewable energy (56.4%), energy efficiency (49.1%) and health (40%). Pensions for Purpose said biodiversity was also becoming an important area of interest, which, it said, indicated that UK pension funds were moving beyond traditional environmental concerns when considering impact. 

Listed equity was the most common asset class across the funds surveyed, comprising 56.5% of total assets under management and 38.2% of impact funds. The private market’s most common asset class was real estate, accounting for 14.6% of total assets under management and 18.2% of impact funds. 

Reframing of fiduciary duty?

The report adds to a growing body of evidence that pension funds are gradually reframing their view of fiduciary duty, especially in Europe, but also globally.

Pensions for Purpose has also been pushing for pension funds to take a longer-term view of sustainable investment and consider intergenerational fairness in their investment and management strategies to better take into account the interests of younger pension holders likely to feel the most acute environmental and social impact of climate change in years to come.

The hope is that pension funds will respond to findings such as those in this report by building on their increasingly strong showing in the impact market.

In 2022, pension funds provided the largest share of impact investment managers’ capital (20%), followed by family offices (15%), development finance institutions (14%), insurance companies (7%) and banks (7%), according to a Global Impact Investing Network (GIIN) report on impact investing allocations published earlier this year. 

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