Factors 2023

Organisations were scored based on 35 questions across four components. The average country score was 71 out of a possible 100. This represented an increase of seven from last year’s average score of 64. The biggest Canadian public funds continued to be the leaders in governance disclosures, consistent with their reputation of excellent governance. Australia, Sweden, Denmark, the United Kingdom and Finland scores improved significantly as they made changes to improve their governance disclosures.

In last year’s review we noted that governance scores were most closely correlated with the overall score and posited that perhaps it was that case that as good governance produces positive results, it creates greater incentive (or perhaps less disincentive) to be transparent with stakeholders. There is evidence of a relationship between responsible investing and governance scores. Good governance allows funds to move beyond simply managing assets and towards addressing wider environmental and social issues.

The governance factor was assessed by looking at four criteria

1. Governance structure and mission.
Average country score: 85 (last year 77)

Scores for this component far exceeded those of any other three components with more than 75% of funds scoring greater than 80. Only the Mexican funds scoring less than 60 on average. The average score of 85 was an 8 point improvement from last year’s review.

High scores in this area should be expected as many of the items reviewed represent the bare minimum stakeholders should expect. Fortunately we observed almost universal disclosures (73 of 75 funds) of the following basic information:

• An overview of the governance structure;
• Disclosure of the names of the board of directors; and
• Disclosure of all subcommittees subordinate to the main board.
  

It was heartening to see improvements in some areas from last year’s reviews:

• 83% of funds reviewed now disclosed their mission statement, up from 69% in last year’s review.
• Disclosures of conflict of interest policies and proxy voting policies also improved, in line with improvements in RI disclosures. There is still room for improvement, only 63% of funds disclosed their conflict of interest policies.

Scores in other areas were not as encouraging with basic disclosures far from universal:

• 15% of funds did not disclose how or by whom board members were selected; and
• Despite the almost universal disclosure of sub-committee names, only 85% of funds provided details on each committees’ responsibilities with only 78% listing the membership of each committee.

Many disclosures were commendable but there are some areas that need improvement including:

• While most funds did disclose their governance structure, some disclosures were vague and unclear. These disclosures seemed to assume readers would be familiar with governance norms of the country. This seemed particularly true in countries where fund governance structure is quite tightly regulated.
• Disclosures on the selection/election of board members were often quite vague and rarely talked about timing of past and/or future elections/selections. In addition, committee member start and end dates were often not disclosed, and if they were, start dates were far more common than end dates. In combination, it is hard for stakeholders to gauge how frequently the board turns over and evolves.
• Although more than half of funds disclosed board policies around conflicts of interest, in some instances, the language was confusing and seemed uncommitted. A clearly written conflict of interest policy gives confidence and trust in a well-governed organisation.

2. Board competencies and qualifications.
Average country score: 41 (last year 36)

Disclosure of board competencies and qualifications continued to disappoint, despite an improvement in the average score from 36 to 41. Canada continued to be the only country to score above 80. South Africa joined the United Kingdom and Australia as the only other countries to score above 60 in this area.  

Disclosure of board member experience and relevant qualifications continued to be the only area in which most funds reviewed received a positive score. Despite more funds disclosing this information this year (60% vs. 55% in last year’s review), the result is still very disappointing for what should be a basic disclosure.  

It was pleasing to see increased disclosure prevalence in some areas, including:

• An increase in the number of funds that disclosed board education policies. Prevalence was still low at 36% of funds globally, but nonetheless a marked improvement from last year when only 21% of funds made such disclosures; and
• 28% of funds saw fit to disclose desired board competencies, up from only 17% of funds last year. Still only 9% of funds saw fit to compare and contrast desired competencies with those actually possessed by current board members, an improvement from a very low 5% of funds in last year’s review.

It goes without saying that there continues to ample room for organisations to improve including the items below which all saw disclosures from less than half the funds reviewed:

• The use of plain language to describe the skills and qualifications of board members and how they are relevant to the oversight of the fund;
• Demonstrating a commitment to having a knowledgeable, well qualified board by disclosing actual versus desired board member competencies, continuing education initiatives and board review processes; and
• Holding board members accountable by disclosing board member attendance at both the full board and for any subcommittees.

3. Compensation, HR and organisation.
Average country score: 51 (last year 44)

Compensation, human resource and organisational information disclosure continued to display the highest variability across countries of any component. The overall average score of 51 was an improvement from last year’s score of 44. Four countries had scores of 75 or above. Conversely there were also four countries that scored less than 25 in this area.

Salary disclosure continued to be the biggest factor leading to differences in scores across the countries reviewed, with little change observed year over year:

• In four countries, all five funds disclosed board member compensation, in three others, none of the five funds did; and
• In two countries, all five funds disclosed total compensation for the CEO and their top two reports, in six others, none of the five funds disclosed management salary information.

Disclosures in most areas improved year over year, with a couple of notable improvements:

• Slightly more than half of the funds reviewed now disclosed the processes and/or philosophies used to determine board compensation. We observed such disclosures at 53% of funds reviewed this year, up from 39% of funds last year.
• The focus on diversity is growing globally and two-thirds of all funds made disclosures about employee diversity programs. In all countries, at least one fund reported on their diversity programs. Last year only 51% of funds reviewed disclosed their diversity policies. 

Recognising that disclosure of actual remuneration may be a difficult sell in countries where it is not required, there are still several areas where compensation, HR and organisation disclosures could be improved:

• Many disclosures on board compensation philosophy were quite vague. It would be good to see more disclosures around time commitments and peer groups used to determine board compensation.
• Disclosures around management compensation philosophy are more insightful if they provide clear details on how variable compensation is aligned with stakeholder outcomes. Better still if the relevant organisational results are disclosed along with actual management remuneration to demonstrate that compensation philosophy is being followed in practice. Only 13% of funds reviewed provided such disclosures.

4. Organisational strategy.
Average country score: 71 (last year 63)

The items scored under this component were heavily revised from last year. The focus now being on corporate goals and results as well as disclosures of the management of both financial and non-financial risk factors. In last year’s review these items were covered in other sections.

Overall the results were positive with an average score of 71, which represents and increase from a restated score of 63:

• 96% of all funds disclosed investment/ financial risk management governance policies and practices.
• Disclosure of non-investment risks was lower, with 81% of funds doing so. For the most part these disclosures were detailed and fulsome, with many funds dedicating entire sections of annual reports or policy documents on risk management for both investment and non-investment risk.

What funds can do better:

• While more funds are making disclosures of overall corporate strategy, many still focus almost entirely on investment matters. Much like traditional corporations in other industries, asset owners’ corporate strategy extends beyond their core mission. Stakeholders are interested and deserve insight into corporate direction and plans. Examples could include plans to in-source certain functions, development of a new website or member portal, or perhaps human resource initiatives. A review of progress in the prior year is good, disclosure of strategies for the following 3-5 years, even better.
• Measuring corporate achievements against corporate goals in a quantitative way. For the 65% of funds that discussed their goals for their previous year, less than half of those funds measured them quantitatively. Discussions on corporate strategy do not hold as strong a weight if they are not benchmarked and compared against a measurable standard.

To view all questions to each component, visit the Methodology page here.

Performance scores were based on up to 47 questions across seven components that were common to all, and two (member services and funded status) that were only applicable for some organisations. Components were re-weighted to accommodate what was not applicable, so that each individual fund was scored out of 100. The overall average score was 64, up from 62 last year and the second highest scoring factor after governance (71). Average country scores ranged from 32 to 89.  

Disclosures were generally comprehensive for the current year and at the total fund or investment option level. In contrast, reporting on longer time periods and asset class results were more often minimal or missing although more funds were observed disclosing intermediate (i.e. three to seven years) performance figures. 

The components with the highest scores continued to include asset mix and portfolio composition and risk policy and measures. Similarly the lowest scores were seen for asset class returns and value added and benchmark disclosures. 

The Canadian funds now lead the way, with an average country score of 89 for the performance factor. The US funds typically had extensive and good quality reporting across all performance components. All country rankings and scores were as follows.

1. Total fund or investment option returns and value added.
Average country score: 76 (last year 75)

Scores in this component increased marginally to 76 from last year’s average score of 75. Current year disclosures continued to be almost universal. Scores dropped off for intermediate-term (any of 3 – 7 years) and long-term (10 years or more) disclosures. This year’s review found that 88 per cent of funds disclosed intermediate returns, an increase of 9 per cent from last year. Six countries had average scores over 90, an increase of two from last year. 

• 100 per cent of all funds reported one-year total fund or investment option returns
• 86 per cent of all funds reported one-year value added at the total fund or option level, down slightly from 88 per cent last year.
• 86 per cent of all funds reported current performance (e.g., quarterly, monthly) on their websites, a slight increase from the 83 per cent observed last year.
• Only 50 per cent of all funds reported long-term value added

2. Asset class returns and value added.
Average country score: 37 (last year 35)

Similar to fund level disclosures, we observed a slight improvement in asset class level disclosures, with the average country score increasing from 35 to 37. We continue to be surprised by the contrast between the generally good total fund/investment option scores and the much lower asset class level scores. Asset mix decisions drive about 97 per cent of total fund or investment option results and asset class performance is fundamental to understanding overall results The US continued to lead the way with an average score of 100 but only three countries had scores of 60 or more. In contrast, seven countries had average scores less than 30, one more than last year. Individual fund scores ranged from 0 to 100. 

• One-year asset class return disclosure continued to be the highlight: 76 per cent of all funds reported this, unchanged from last year.
• 37 per cent of funds now report intermediate asset class returns, up from only 31 per cent last year.
• Disclosures of long-term asset class performance and value added continued to be disappointing with only 23 per cent reporting performance and 18 per cent reporting value-added, both slight increases from last year.

3. Clarity on basis for return and value-added calculations.

Average country score: 63 (last year 64)

To understand and compare total fund and asset class returns and value added it is essential that the basis for return calculations is also understood. Are the returns time-weighted or IRR? Are returns gross or net of investment costs (and all costs or only some costs)? This is not hard to do and some funds do provide concise and clear descriptions where they report returns and value added. Like last year, these disclosures were all too often non-existent, minimal, cryptic, or not provided where returns and value added were reported. The average country score declined slightly to 63 for 64 last year. The US led the way this year with an average score of 88. Switzerland, the top scoring country last year, regressed but was still one of four countries with average scores of 80 or more. The lowest average country score was 34. Individual fund scores ranged from 0 to 100.  

• 89 per cent of funds disclosed the cost basis for returns and 83 per cent of all funds reported total fund or option returns net of investment costs, both relatively unchanged from last year.
• In contrast, it was only clear to us that 57 per cent of all funds reported asset class returns net of costs, an improvement from 53% last year.
• Last year, 60 per cent of all funds clearly reported that they were disclosing time-weighted returns (TWRR), which unfortunately dropped to only 53 per cent of funds this year.

4. Benchmark disclosures.
Average country score: 40 (last year 44)

Interpreting and comparing of reported value added is challenging because of the diversity of benchmarks or targets utilised across funds. Approaches at the total fund or option level included: real return targets (e.g. CPI + 4 per cent); actuarial-based target returns; competitor returns for similar investment options; and aggregations of asset class passive indices. Positive scores were awarded for value added reporting when any type of benchmark or target return was used at the total fund or option level. But positive scores for value added reporting for public market asset classes were only awarded for what was considered ‘appropriate’ benchmarks. The benchmarks used for private market asset classes were not scored.

US funds again led the way with an average score of 80, but only four countries had average scores of 60 or more.  

• This year we scored if funds clearly disclosed how they determine their overall fund level benchmark. Unfortunately, only 16 per cent of funds reviewed did so with clarity.
• More positively, 57 per cent of all funds had clear disclosures of their benchmarks at the asset class or option level and 44 per cent of all funds reported clear and appropriate benchmarks for public market asset classes. That said, both were slight declines from last year’s scores of 60 per cent and 49 per cent respectively.

5. Asset mix and portfolio composition.
Average country score: 56 (last year 61)

Asset mix and portfolio composition reporting provides important context that helps stakeholders understand portfolio diversification as well as the related returns and risks. These disclosures were generally quite extensive, but the communication quality was wide ranging. Some were uninspiring ‘data dumps’ (e.g. endless lists of portfolio holdings) whereas others provided helpful and insightful summaries and context.  

This year’s review included two items that were previously reviewed in the governance factor. These were whether a fund discussed their philosophies around active/passive management and internal/external management. Disclosures of either were rare, with fewer than one in six funds reporting either.

Scores in this component were consistently mediocre. Canada achieved the highest average country score at 76, with Sweden and the US the only other countries to score 70 or above. All but Mexico achieved average country scores above 40. 

• All but one fund reported current asset mix, which was one fund less than last year’s review.
• In contrast, only 56 per cent of all funds provided an asset mix trend (three or more years), a slight decline from the 59 per cent of funds that did so last year.
• 71 per cent of all funds provided summaries of at least their largest holdings and many provided all holdings and 66 per cent of all funds provided details of their largest external managers and many provided all holdings, both slight improvements from last year’s review.

6. Risk management policies and specific risk measures.
Average country score: 77 (last year 82)

This component was revised from last year’s review and now looked only at quantified risk statements. Questions of a qualitative nature, i.e. disclosures of risk practices and risk governance, are now reviewed in the Governance factor.  

Disclosures in this area continued to be observed among most of the funds. Six countries had average scores of 90 or more and the lowest score was 37. 

• 81 per cent of all funds provided quantified risk measures at the total fund/investment option or asset class level. Examples of such measures are value at risk (VAR), portfolio volatility, expected years with negative returns).

7. Explanation of key results and outlook.
Average country score: 77 (last year 72)

This is a component that provides an opportunity for funds to improve the depth and quality of their disclosures. Discussions of results and the key factors driving them can provide important context for stakeholders. There were some very interesting and insightful discussions. Others were more cryptic and did not provide material additional information. The scoring system provided for an assessment of this ‘quality’ range.  

The country average score improved from 72 last year to 77. The Dutch funds continued to lead the way in this area with an average country score of 96. Seven countries had average scores of 80 or more, two more than last year and the lowest score increased to 42, from 22 in last year’s review. 

• 96 per cent of all funds discussed the impact of economic and market conditions on total fund or investment option key results over the past year, an increase of 5 per cent over last year’s review.
• The percentage of funds that included a ‘looking ahead’ discussion of economic and market expectations and possible implications increased markedly, from only 61% of funds last year, to 88 per cent of funds this year.

8. Member service goals, plans and service level reporting.
Average country score: 60 (last year 65)

76 per cent of individual funds reviewed had member service operations and 24 per cent did not, with member services typically provided by a different organisation that was not reviewed. Considering that pension funds exist for their members, we continue to be disappointed overall by the levels of disclosures by some funds. In contrast some member service disclosures were excellent. With a score of 100, Canada now has the highest average score, with Australia slipping to third overall. There continued to be a wide dispersion of results: three countries had average scores of 85 or more while five countries had average scores of 50 or less.  

• 69 per cent of funds with member service operations discussed member service goals, progress, and plans 
• 63 per cent of funds with member service operations provided actual service level performance outcomes for member transactions or experiences (e.g., call answer time)
• 53 per cent of funds with member service operations reported any of customer satisfaction, customer effort or net promoter scores.
• 44 per cent of funds with member service operations discussed service levels with reference to external benchmarks

9. Funded status and discussion of assumptions and risks.
Average country score: 92 (last year 96)

Funded status and related disclosures were relevant for only 56 per cent of funds studied: those with responsibility for both assets and liabilities for defined benefit plans and ‘insured’ benefit schemes. This is a very complex area plus regulatory regimes and rules are not uniform. Highly technical required reporting was the norm. Some funds did provide excellent reporting that made the material easier to digest and more relevant for non-actuaries. Scores were skewed high: seven countries had an average score of 100 and the lowest average country score was 60.  

• All but one fund reported their period-ending funded ratio or solvency position 
• At 84 per cent, fewer of these funds disclosed trends in funded ratio or solvency position (3 or more years)
• 84 per cent of these funds discussed key assumptions underlying their funded status or solvency position (e.g., longevity, mortality, return and interest rate assumptions)

To view all questions to each component, visit the Methodology page here.

Funds were scored based on 53 questions across three major components. The average country score was 59 out of 100, up from 49 in last year’s review, once again marking the biggest relative improvement among any of the four factors. Improvements to disclosures were evident across all components and most countries. RI did continue to have the greatest dispersion of scores reflecting that countries are at different stages of implementing responsible investing within their investing framework. Average country scores ranged from 0 to 94.  

The Netherlands remained in first place with a score of 89 (up from 77 the year before). The Canadian and Swedish funds were not far behind scoring 85 and 82 points respectively.  Both countries had improved disclosures over the past year. The Nordic countries – Sweden, Denmark, Finland, and Norway – continued to do very well on RI as a region, with all countries receiving scores above the overall average.

1. Responsible investing framework and reporting.
Average country score: 54 (last year 48)

Responsible Investing framework and reporting was again one of the higher scoring components. Sweden continued to stand tall, increasing their average score from 92 to 94 as three of the Swedish funds scored 100 in this area, with even the lowest scoring Swedish fund obtaining a score of 80. This type of consistency was not seen in other countries and is likely reflective of rules for responsible investing implemented in Sweden. Part of this new legal framework is uniform reporting guidelines that impact the largest funds.  

On the other end of the spectrum, two of the lowest scoring countries, Mexico and Chile, showed some improvement and saw their average scores increase from 7 and 10, to 18 and 17, respectively. This occurred as more funds in these countries provided disclosures around climate change and included ESG/sustainability in their goals/mission for the fund.  

Notable results from this component included:   

• 89 per cent of all funds disclosed that they had an established policy/framework for RI
• 77 per cent of all funds disclosed that they had a climate change policy (either as part of the overall RI policy or as a stand-alone policy)

Last year it was clear that while most funds disclosed that they had an RI policy/framework, specifics on targets and measuring outcomes were not as robust. This year we have seen a tangible improvement in funds setting and reporting on these goals.   

• 72 per cent of all funds disclosed their goals/targets for responsible investing compared to 56 per cent last year; and
• 57 per cent of all funds disclosed how they have progressed on their responsible investing goals/targets compared to 49% last year.

2. Responsible investing governance.
Average country score: 39 (last year 34)

Responsible investing governance was one of the lower scoring components, though we did see some improvement this year. For RI to be successfully implemented there needs to be oversight and accountability. For this component, marks were provided for disclosures that clearly laid out where the oversight of responsible investing resides and who is accountable for ensuring that RI policies are implemented. This year Australia joined the list of countries where RI was part of the board’s oversight across all funds (Australia, Finland, South Africa, Sweden, and the UK).  

Areas of notable improvement included:

• 71 per cent of all funds disclosed whether RI is part of board oversight (67 per cent last year)
• 65 per cent of all funds disclosed whether there is a designated role/team to oversee the RI mandate for the fund (51 per cent last year)
• 60 per cent of all funds disclosed how RI is integrated at the executive management level (48 per cent last year)

3. Responsible investing implementation.

The responsible investing implementation component was divided into four categories representing the most common strategies.

i. Exclusion.
Average country score: 47 (43 last year)

Exclusion refers to the strategy of using negative screening or enhanced ESG monitoring as part of the investment process. Exclusion was most common in Sweden and the Netherlands. Every fund in these countries used exclusion as part of the investment process and disclosed the criteria used for screening and provided a detailed list of excluded investments.

• 64 per cent of funds disclosed whether a negative screen or enhanced ESG monitoring was used as part of the investment process (61 per cent last year)
• 49 per cent of funds disclosed the criteria used for negative screening (exclusion policy) or enhanced monitoring (44 per cent last year)

ii. Active ownership.
Average country score: 60 (52 last year)

Active ownership refers to engaging with and influencing companies to conduct their business in a way that promotes responsible investing and aligns with ESG factors that the fund is focused on. Included in active ownership is active participation in shareholder meetings and exercising voting rights. Compared to the other implementation strategies, active ownership scored the highest. Even some countries that scored poorly in other components of RI or scored poorly overall tended to score higher on active ownership. This may be because funds starting to implement RI typically focus first on public equities and active ownership is a key implementation strategy for this asset class. Canada had the highest average score for active ownership at 100. This was one area where we saw the largest improvements, especially among funds that “middle of the pack” last year. These funds have started reporting on their engagement activities, some of which use third-party organisations to structure their engagements.

• 71 per cent of all funds disclose an ownership policy that outlines engagement activities with investees (64 per cent last year)
• 73 per cent of all funds disclose a policy for active participation in shareholder meetings and exercising voting rights (60 per cent last year)
• 63 per cent of all funds summarize engagement activities and what the resulting outcomes were (52 per cent last year)

iii. Impact investing.
Average country score: 48 (37 last year)

Impact investing refers to the strategy of investing in opportunities that promote sustainability (eg, renewable energy, green bonds). We saw a lot of positive improvements in this component, especially as many funds started to highlight their green investments as well as disclose targets to increase investment in these areas. Most of the European countries aligned their impact investing with the United Nations Sustainable Development Goals.

• 71 per cent of all funds disclosed that investments were made in companies that promote sustainability (56 per cent last year)
• 57 per cent of all funds provided list or examples of investments made as part of their impact investing program (45 per cent last year)
• 47 per centof all funds utilize or align with the United Nations Sustainable Development Goals (SDGs) (43 per cent last year)

iv. ESG Integration.
Average country score: 32 (27 last year)

ESG integration refers to how funds integrate RI across the different asset classes and the total portfolio. Funds were scored on disclosing RI policies for external managers, for investment/asset class level frameworks and for disclosing the impact of ESG integration across the fund. ESG integration scored the lowest within the implementation component, with slight improvements this year. The Netherlands scored the highest with an average score of 59 with all funds disclosing their RI policy for external managers and all were Principles for Responsible Investing (PRI) signatories. 

• 72 per cent of all funds disclosed they were PRI Signatories (63 per cent last year)
• 56 per cent of all funds disclosed RI policies for external managers (including climate change specifics) (44 per cent last year)
• 43 per cent of all funds disclosed that ESG factors are taken into consideration as part of risk management (33 per cent last year)

To view all questions to each component, visit the Methodology page here.