What was once reserved for charities and public funds is now completely mainstream. According to the Global Sustainable Investment Alliance 2018 report, the sustainable investment market accounts for over $30 trillion worldwide.

With the support of regulation and driven by public pressure, pension funds have moved RI to the top of their agendas, publicly outlining how environmental, social and governance (ESG) factors are considered.

As RI reaches ubiquity in the pensions industry, we look at how pension funds can measure success by considering the following:

· Is there any evidence that RI helps rather than hurts performance?

· Why does transparency matter?

Sacrificing or enhancing returns?

Research carried out by Morgan Stanley on 11,000 mutual funds between 2004 and 2018 revealed that “there is no financial trade-off in the returns of sustainable funds compared to traditional funds, and they demonstrate lower downside risk.” The study also found that, during periods of high market uncertainty sustainable investment strategies potentially reduce volatility.

Similarly, recent research from Morningstar on the long-term performance of 745 sustainable funds showed that the majority of strategies outperformed non-ESG funds over one, three, five and 10 years.

Last year some of the world’s largest asset owners asked CEM to compare performance and cost amongst funds that have signed up to the United Nations Principles for Responsible Investment (PRI) and those that have not. The CEM database contains data from approximately 350 of the World’s leading investors and we have long histories of cost and performance from most.

The data tells us that, on average, being a PRI signatory did not hurt performance nor did it increase costs. In fact, PRI signatories performed better during the 5-year period covered (ending 2018) and had lower costs.

It would be a stretch to say that those funds outperformed because of RI. The PRI signatories in the database account for about 60% (USD$6 trillion) of the total assets under management covered by CEM. These larger funds have big internal investment teams, and research shows they would be expected to out-perform smaller, less internally managed funds.

These advantages explain some but not all of this out-performance. The most definitive conclusion is that we found no evidence of systemic higher costs or underperformance in the PRI signatory group.

The need for transparency

Amidst the hype surrounding Responsible Investment it can be difficult to separate transparency from greenwashing and understand what pension funds are actually doing. Transparency is essential if funds are to build relationships of trust with a broad range of stakeholders. It encourages clear goals and accountability.

To address the issue of transparency, CEM Benchmarking, in collaboration with Top1000funds.com, have developed the Global Pension Transparency Benchmark (GPTB)* - a new global benchmark that focuses on transparency and quality of public disclosures in four areas - Performance, Costs, Governance and Responsible Investing.

Within the RI component of the GPTB there are three key elements that we think pension funds should be considering:

RI Framework & Reporting

How is RI part of the overall strategy for the fund? This includes the goals and targets for RI and whether disclosures include the progress made towards these goals and targets.

RI Governance

For RI to be successful there needs to be accountability. The responsibilities for oversight and implementation need to be clearly laid out. Is RI part of the board’s oversight and how it is integrated within the organization? Is there a dedicated role or team?

RI Implementation

Do funds disclose the key policies they use to implement RI? For example, exclusion, active investing, impact investing or ESG integration. Funds do not necessarily have to employ all these implementation strategies. However, transparency around not employing specific policies is important.

The fear of sacrificing performance in favour of ‘doing good’ should no longer be a stumbling block to pension funds integrating RI into their investment programmes. Choosing how to invest your assets responsibly is one part of an overall strategy that should incorporate measurable goals, accountability for progress and disclosure of the policies used to implement RI. This requires a commitment to transparency and a willingness to engage with stakeholders to encourage better outcomes for all. The world’s most challenging problems cannot be solved by good intentions. RI has the potential to tackle the issues of poverty, inequality, and injustice, while ensuring a healthier environment for us all.

* The Global Pensions Transparency Benchmark (GPTB) will launch in February 2021. We look forward to sharing more about this and our PRI research later this month.