Pension funds believe in responsible investing, according to the report

Poor market performance last year affected a wide range of investment strategies and ESG was no exception. However, this underperformance is viewed by pension funds as a temporary setback and not a permanent trend.

According to a study published by CREATE-Research and Amundi, a leading European asset manager, responsible investment remains essential to creating long-term value in an environment where the fight against global warming and social inequality is essential.

The study was carried out after surveying 158 pension funds worldwide, which represent €1.91 trillion in assets under management. She is interested in how ESG investing might evolve beyond 2022, which has proven to be an exceptional year.

The fund’s interest in ESG remains strong despite the market downturn in 2022

The year 2022 was marked by rising global inflation and the Russian invasion of Ukraine, which shook the financial markets. Responsible investing suffered as markets fell in response to these events, reminding investors that the segment is not immune to market shocks. Thus, 63% of survey respondents made sector bets that turned out to be inappropriate, especially as energy sector stocks took precedence over decarbonisation targets. In addition, 53% of respondents fear political backlash against ESG in the United States, the world’s largest market for mutual funds.

However, the conclusions of the investigation are clear. The funds surveyed certainly recognize that responsible investing could be affected by the global environment from time to time in the future. But most survey respondents (79%) think so ESG criteria will not harm long-term performance.

Appetite therefore remains strong and responsible investing will continue to feature increasingly in pension fund strategies. During next three years 53% of respondents ensure a increase of responsible investment in their active portfolios and 49% in their passive portfolios.

Vincent Mortier, Chief Investment Officer, Amundi : ” All observers understood that 2022 was a difficult year. But despite the fact that responsible investment strategies have been particularly affected, it is heartening to see such optimism on the part of institutional investors. The survey shows that pension funds remain decidedly positive about responsible investing and maintain a strong interest in these products. The impact of this typology of investors on track shifting and impact should not be underestimated. »

ESG should not be considered philanthropic financing
The development of responsible investing is characterized by a dual goal: to have a positive financial performance and at the same time bring change for society as a whole. One respondent explained: “ We want to see concrete evidence that our investments are working financially and socially. »

To ensure that their portfolios respond to this duality, the respondents presented two sets of objectives:

Above all, they adhere to the basic principles of investing:

  • Minimize risks associated with ESG criteria (57%)
  • Improve revenue by capitalizing on opportunities (53%)
  • Pursue social, environmental and financial performance (51%)
  • Reduce portfolio volatility (34%)

Only 14% are willing to pursue ESG goals at the expense of portfolio returns

It then seeks to fulfill secondary objectives such as:

  • Finding the best compromise between pillars E, S and G (49%)
  • Reduction of operational and reputational risks (34%)

Amin Rajan, Director of CREATE-Research who led the study: ” Responsible investing has evolved. Today, we are witnessing the emergence of a more robust version that focuses on results and responsibilities in very specific ways, as well as financial return. This shift is a watershed moment for responsible investing and means it takes a place at the heart of pension fund portfolios. »

The evolution of the capital markets ecosystem and climate policies have become real drivers of responsible investment

Several forces support responsible pension fund investment policies, including developments in capital markets and climate policy.

First, capital markets are evolving and profits are no longer the only key. Companies must act in accordance with the interests of their shareholders as well as their employees, customers and communities in general. The main means pension funds use to respond to the various interests of stakeholders are:

  • Principles stewardship and exercise of voting rights (68%);
  • Investments in so-called companies best in class » in its category with a high or better ESG score (56%);
  • integration of ESG criteria into investment processes (52%);
  • Exclusion of companies with poor ESG scores (41%)
  • Impact investing (35%).

Another strong driver is climate change policies. Inflation Reduction Act in the United States and program”Suitable for 55” in the European Union recently changed the situation. Sectoral initiatives to act collectively, such as Net Zero Asset Owner Alliance and Net Zero Asset Managers Initiative, should also provide further impetus. Currently, every second pension fund has a strategy net zero and one in four reports on the subject is ongoing.

Monica Defend, director of the Amundi Investment Institute: “ Over the past twelve months, we have seen the announcement of a number of new regulatory and policy initiatives, such as the Inflation Reduction Act in the United States and RePowerEU and the Net Zero Industry Act in Europe. Governments and regulators play an important role in promoting responsible investment. We expect policymakers to continue to push things forward, for example by promoting transparency or helping the market assess different risks and opportunities.”

Stocks and bonds are the preferred asset classes for achieving Net Zero goals

50% of respondents said they favor equities when asked which asset classes are best suited to achieving the goal of “zero carbon” by 2050. Equity markets do allow for tight governance and voting rights. In addition, they offer great liquidity and allow targeting of ESG “clean players” such as renewables, as well as more polluting and hard-to-reach industries (“hard-to-cut industries”) such as cement and steel.

In second place is the bond market (41%). As more and more pension funds enter the run-off phase due to demographic aging, green, social and sustainability-linked bonds have become attractive.

Alternative assets are in third place (38%). The focus then shifts to green infrastructure, environmentally friendly buildings, private equity and private debt. Private equity is well-positioned to join the ranks of companies furthest behind ESG and improve their environmental commitments, with or without tax incentives.

Progress in responsible investing is most visible in thematic investing and also in the selection criteria of management companies

As investors become more sophisticated, the choices and trade-offs between the various ESG pillars are becoming clearer and a more granular approach has been developed. Within each pillar, themes emerged:

  • Eenvironment: The most popular topics are climate change and carbon emissions (63%), followed by biodiversity (48%), water conservation (42%) and waste management (36%);
  • WITHsocial: employee engagement and working conditions (57%), human rights (42%) and data protection and privacy (32%);
  • Ggovernance: executive compensation linked to ESG performance (61%), board diversity (57%), independent audit committee structure (46%) and zero tolerance for corruption (40%) .

As pension funds advance their responsible approach, the list of criteria for selecting external managers for ESG investments is growing. These criteria can be divided into two categories: qualifying criteria and distinguishing criteria.

The first category includes basic investment principles that give the manager basic credibility. These include a value-for-money fee structure (58%), followed by embedding ESG core values ​​in company culture (56%).

The second set has more weight because it covers value creation for clients, such as achieving clients’ ESG goals (67%), but also stewardship and exercise of voting rights (65%). This set also takes into account the fact that it has a reservoir of significant talent and expertise (6 3%) and has available content thought leadership widely recognized (57%).

Leave a Comment