A culture of “mixed signals” in U.S. politics has contributed to an uncertain environment for pension funds when it comes to sustainability, according to a report by the United Nations Principles for Responsible Investment.

The UN PRI report followed research from 2020 and 2021 that found “policy, structural and market barriers” to sustainability in the U.S., U.K., and Australia. The latest work identified 10 separate priorities these jurisdictions needed to address when it came to sustainability.

The U.S. pension fund system was found to have “mixed signals” when it came to ensuring that pension funds have adequate incentives to support sustainability objectives.

In an interview with Pensions & Investments, Rene van Merrienboer, director of sustainable markets at UN PRI and a contributor to the report, said of the the U.S.: “It’s fair to say that the political landscape and the uncertainty around it is making it a very difficult operating environment for pension funds (for sustainability oversight).”

The report highlighted the lack of specific regulatory incentives for long-term investment horizons in the U.S.

“Market practitioners such as investment managers tend to have short horizons, with a continuing focus on quarterly performance in client reporting, which can have an impact on pension funds’ longer-term objectives,” the report said.

A ruling from the U.S. Department of Labor in January 2023 restored the understanding that fiduciaries of retirement plans regulated under the Employee Retirement Income Security Act may consider ESG factors when these are relevant to a risk-return analysis.

However, a Donald Trump victory in November’s U.S. presidential elections might reverse that. In addition, there may be the passing of national anti-ESG legislation directed at pension funds similar to laws already passed in states such as Texas.

Australia, U.K. vs U.S.

The UN PRI assessment of the U.S. pension fund sustainability landscape contrasts with Australia, which was described as “a successful system that ticks a lot of boxes” Van Merrienboer said.

Australia was commended in areas such as pension funds’ benefits of scale, while being able to share resources and maintain goals related to sustainability.

The report also found that in the U.K., “extensive” activity by policymakers and regulators since the UN PRI’s 2020 report meant there were now “relatively few” gaps in the U.K. policy framework related to climate risk. However, the report also claimed that the framework “remains incomplete” in terms of consideration of wider sustainability risks, such as nature related risks and sustainability outcomes.

In 2021, the U.K. became the first country to mandate larger pension schemes to report in line with the requirements of the Task Force on Climate-related Financial Disclosures.

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