The beginnings of ESG reporting in pension fund annual accounts

As a reminder, the Swiss Pension Fund Association (ASIP) wishes to provide more "food for thought" in this area and published, on December 13, 2022, a new recommended ESG reporting standard for Swiss pension funds. According to this recommendation, reporting is to be implemented on an annual basis, either in the form of a separate sustainability report, or as part of the annual accounts reporting, starting as soon as the 2023 financial year. The aim is of this proposed standard is to achieve more consistent and comparable reporting across all Swiss pension funds.

The question of how, or even whether, Swiss pension funds should focus more on sustainable asset management has been the subject of debate for some time now. While investment opportunities in sustainable products have been multiplying in Switzerland over the past few years, some pension fund managers have so far reacted only timidly. This is hardly surprising, given that there was no obligation to do so. However, priorities are changing, and we are increasingly seeing the development of clear guidelines and concrete possibilities for more sustainable implementation. Indeed, voices have long been raised to emphasize that pension funds have, so to speak, a "fiduciary duty of care" in this respect. Although they are not legally obliged to integrate climate risks into asset investments, they are nonetheless required to consider all relevant investment risks and opportunities.

An initial request has therefore been made to financial market players to contribute to greater transparency and quality in the presentation of ESG-related data by providing, as soon as 2024 for the 2023 annual accounts, more comparable and reliable data. The inclusion of such new data in a report available to insured plan members also improves communication with insured members and other stakeholders who are also interested in the matter.

The next steps

Several pension funds are already working on this new proposed reporting and WTW is currently working with clients to help them prepare an initial report containing the qualitative and quantitative elements required for a first presentation of the work carried out on the theme of sustainability / ESG. For the time being, this mainly concerns those who have done the most work and whose ESG convictions are the best established. The ASIP has also proposed a format for the proposed standard report, which we summarize below with the main elements required in 5 steps (more information available on the ASIP website).

In conclusion, current and future generations of pension fund managers and insured members are paying increasing attention to the sustainable aspects of pension fund investments. In the long term, this will certainly have beneficial effects and boost confidence in the financial management of the 2nd pillar. An investment approach which adds an ESG and sustainability lens to its strategy of investment will soon become standard practice and continuous improvement processes in sustainability and ESG are expected to create "best practices". Finally, the ASIP proposed standard already represents an important step towards greater transparency for Swiss pension funds, and we expect to see the first reporting on the 2023 financial year in the early months of 2024.

1. 01

   The most important facts in a nutshell: Introduction to the topic of "Sustainability and the Pension Fund".

   Subdivision of the main part of the reporting into a qualitative and a quantitative part.

2. 02

   Basics and goals: Qualitative statements on the sustainability strategy.

   The focus is on discussing and presenting the goals and principles of the sustainability strategy:

   • What motivates them? (e.g. reputation, regulatory, performance and risk considerations).
   • What is the basic positioning of the pension fund (e.g. minimum requirement, best practices, market leader)?

   Depending on the objective, the chosen approaches should be documented and assigned to the respective investment categories (e.g. exclusions, stewardship, engagement, impact investments, climate orientation (decarbonisation).

3. 03

   Implementation of the sustainable investment principles

   Statements on the implementation of the sustainability principles and explanation of the implementation techniques. State how the goals will be achieved and which indicators will be used to measure them.

4. 04

   Transparency and reporting: Quantitative statements on the sustainability strategy

   ASIP lists standardised key indicators that should be presented either in a basic report (minimum standard) or in an extended report based on this.

   The indicators that should be presented in the report include:

   • Voting information (e.g. percentage of companies where a vote is held)
   • Engagement information (e.g. list of memberships in initiatives such as Ethos, Climate Action 100+, etc.)
   • Indicators related to the climate dimension of different asset classes (e.g. greenhouse gas emission intensity and carbon footprint for equities and corporate bonds, energy intensity and carbon intensity for real estate).
   • Disclosure of a transparency ratio indicating the proportion of assets for which ESG indicators are published (required for equities, sovereign and corporate bonds, convertible bonds and real estate).

Authors

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Jérôme Franconville

Head Investment Services (Schweiz)

email Email phone +41 21 321 68 04

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Alexandra Tischendorf

CFA Head Investment Switzerland

email Email phone + 41 76 316 92 40

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