Climate change higher on agenda of European pension investors

11 November 2020 4 min. read
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A more environmentally conscious pension investor base across Europe is increasingly taking environmental, social and corporate governance (ESG) factors into consideration when allocating resources. This is according to a new Mercer study.

Mercer surveyed more than 900 institutional investors in 12 countries, in an attempt to see where European money is heading in the future. A representative sample, Mercer’s respondents had combined assets under management of more than €1 trillion.

The promising highlight of the survey results is that investors are increasingly going green, with responsible investing featuring high on the agenda for many. In fact, nearly 90% of investors reported that ESG risks were on their radar this year, representing a monumental jump from last year alone when just over half were focusing on ESG.

Drivers of growing ESG risk considerations

“Our long-term view is that these factors will transition from being afterthoughts of a few investors to become something actively considered in investment strategy decisions,” wrote Mercer Investment Consultant Matt Scott, who co-authored the study. This shift is already occurring to some extent, largely driven by regulatory changes.

Two major regulatory frameworks came into effect towards the end of last year: The 2017 European Pensions Directive and the UK Department for Work and Pensions Investment Regulations, both of which make ESG factors a mandatory consideration for pension fund investments. Not surprisingly, most investors positioned regulatory drivers as key factors pushing ESG considerations to the forefront.

That being said, the last few years have demonstrated how climate change is a real and tangible financial risk, and many have also acknowledged this as a central driver of ESG investments. Consumers are also increasingly conscientious about environmental factors, which puts reputations at stake when it comes to ESG risks. As a result, reputational risks are also up there among the biggest drivers.

Nature and structure of investment plans

So external factors play a big role in driving ESG investments. According to Mercer, a shift is also required in this regard, as truly “incorporating responsible investment into an investment framework begins with developing a set of beliefs.” As mentioned, nearly 90% now consider ESG factors when investing.

However, only 55% of these do so using a responsible investment plan that has been developed around a set of beliefs. While there is room for improvement here, this figure already marks a big jump from 18% last year, indicating that a shift for the better is well and truly underway.

Another trend that has accompanied the centrality of ESG factors is the decentralisation of the decision-making process. More than half of all plans now feature systems to vote for selecting investment managers and monitoring their activity. The upshot is that there is a greater sense of ownership and stewardship when it comes to investment strategy. Once again, regulatory changes might have played a factor here.

Considering investment risks posed by climate change

“The revised UK Stewardship Code, which came into effect on 1 January 2020, was a major overhaul, and we expect it to encourage further focus on stewardship outcomes and ESG integration in future. The first reporting against the revised code is expected in March 2021,” wrote the authors.

Add to this the stipulations from the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), which help keep ESG risk reporting in check for institutional investors across the globe. TCFD represents a number of systematic changes being made to facilitate responsible investments, amid a broader social and political movement to limit climate change.

Mercer cites school strikes across the globe organised by Greta Thunberg last year as an example of this intensifying wave of climate consciousness. While well over half of all investors currently consider the specific investment risk posed by climate change in their strategy, an additional 7% plan to start doing so this year.

On the whole, Mercer reports a growing acceptance of ESG frameworks within the financial world. “We are pleased to see that investors are increasingly engaging with this topic,” wrote the authors.