Pension schemes increase proactivity over ESG as regulatory pressure is felt less

institutional investors esgRegulatory drivers for considering ESG risks within portfolios are becoming less important to European institutional investors, who are instead becoming more proactive.

Asset allocation research among 850 institutions with €1 trillion of assets showed a fall in the number of investors who cited regulation as a push factor in considering ESG risk in their assets.

The percentage of those who felt push by regulation dropped from 85% last year, to 67% this year, according to the European Asset Allocation Insights 2021 report by investment consultants Mercer.

“[The] survey … indicated that investors are moving from a more reactive position to a proactive one, with regulatory drivers decreasing in significance as a motivator for considering ESG risks,” said the firm.

Similarly, there was a large rise in investors using low carbon or climate-related indexation in their portfolios, from 6% last year, to 26% this year.

In total, 76% of plans in the survey considered ESG risks but there was considerable variation by country. Swiss plans were “laggards”, but all Belgian participants considered ESG risks in their plans.

In the UK, 96% of survey respondents said their pension plans had developed an investment policy that took ESG risks into account. 

Matt Scott, strategic research specialist at Mercer and co-author of the report, said: “The vast majority of UK respondents have an investment policy that includes details on how ESG risks are managed. This is unsurprising given most UK survey participants were pension schemes and they are required by law to do so. However, it does illustrate the power of regulation if properly enacted.”

He added that Mercers expected to see investors incorporating a more holistic view of sustainability in future, meaning a move beyond climate awareness and action, to incorporating features relating to the soil, sea, and biodiversity of the planet.

“We also expect investors to broaden the scope of their stewardship activities to include bonds and alternatives and not just equities.”

More generally, Mercer’s 2021 research showed that allocations to alternatives are now almost on a par with equities and for some – such as those in the UK and Germany - even higher. 

The move away from equities continues amongst UK and European investors (from a 22% to a 21% average allocation in total portfolios) as they aim to diversify their return drivers, protect themselves against market volatility and tap into inflation-protected return streams. 

Many defined benefit pension schemes are increasingly seeking diversification via alternative asset classes (from 18% to 20%), such as higher growth fixed income assets, private equity and real assets.


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