A new guide has been launched by the National Association of Pension Funds (NAPF) to encourage its members to invest responsibly by considering 'extra-financial factors'.

The guide helps pension funds to understand and manage environmental, social and governance (ESG) factors so that they can embed them in their investment policies, and it sets out how they can select appropriate investment managers and hold them to account.

The NAPF's guide also looks at individual asset classes like hedge funds, real-estate and corporate bonds, and suggests key points to consider and questions that they should ask their investment managers.

David Paterson, NAPF head of corporate governance, said: "There is clear evidence that extra-financial factors can have a big impact on a company's long term value, reputation and growth. Successfully bringing these factors into investment decisions can help moderate risk and improve returns.

He added: "There is a lot that pension funds can do to help make responsible investment the norm, and we hope that our members will follow the guidelines we have set out. They should develop clear policies that reflect ESG factors in decision-making, and exercise stewardship responsibilities such as engagement and voting."

The guide emphasises that fixed income represents a growing share of most pension fund portfolios, and that responsible investment is just as relevant to fixed income invest as they are to equity investments.

The document, which updates the NAPF's guidance from 2009, also clarifies how responsible investment fits in with pension funds' fiduciary duty.

First published 21.05.2013

monique_simpson@wilmington.co.uk