Confidence back in ESG after 2022 savaging

Despite the fallout from last year’s ‘savage bear market’, pension plan investors’ appetite for responsible investments remains strong, with ESG investing continuing “to deepen its roots in the pension landscape”, a new global survey of retirement investors has found.

Over the next three years, more than half (53%) of survey respondents expect their share of ESG investing in their active portfolios to grow, with around 49% also expecting an increase in ESG in their passive portfolios, the report, commissioned by European asset management firm Amundi, has revealed.

Survey respondents largely understood the inherent volatility in all markets exposed to the unforeseen whim and forces of geopolitics, with ESG investments being no exception. Most expect ESG to be marked by periodic setbacks “due to a larger dynamic that has little to do with ESG investing per se”.

Despite the 2022 downturn, a large majority of survey respondents (79%) remained sanguine about ESG as a portfolio performer, believing environmental, social and governance factors would not hurt pension plan performance over the long term.

Amundi Group chief investment officer Vincent Mortier said it was “encouraging to see such optimism from institutional investors” despite the significant “hit” to ESG strategies last year.

He added that asset managers should “not underestimate the power” of pension plan investors “to move the needle when it comes to making an impact”.

Investors not just here to feel good

ESG investors, the study showed, also recognised full well that these investments are not simply about philanthropy. ESG’s dual focus of “making money while also making a difference for wider society” is well understood by investors.

Indeed, only 14% of pension fund investors said they were prepared to achieve ESG goals at the expense of portfolio returns.

There was, nevertheless, a recognition by investors that capital markets are evolving, with “profits… no longer the sole focus”.

“Companies must promote the interests of shareholders as well as employees, customers, and communities.”

The reasons to invest in ESG were manifold. A large majority (68%) of pension fund holders were drawn, in particular, to the strong stewardship and proxy voting possibilities enabled by ESG equities investments.

However, stakeholder interest was also garnered through concerted investments in best-in-class companies with high or improving ESG scores (56%), integration of ESG factors in the investment process (52%), as well as the exclusion of companies with poor ESG ratings (41%) and push to impact investing (35%).

Noting the impact of the US’s Inflation Reduction Act (IRA), as well as the RePowerEU Plan and Net Zero Industry Act in Europe, Monica Defend, head of the Amundi Investment Institute, recognised the key role of governments and regulators in driving ESG investments forward.

“From increasing transparency to helping markets price in risks and opportunities, we expect to see policymakers continue to progress the ESG agenda.”

Equities still favoured

Equities were seen by at least half (50%) of respondents as the asset classes best suited to achieving the net zero climate goal by 2050.

“This is because equities permit strong stewardship and proxy voting, offer ready liquidity and can readily target ‘pure play’ ESG business models like renewable energy, as well as hard-to-abate sectors, such as cement and steel,” the report noted.

Bonds are the second preference (41%), while alternative assets came in third (38%).

What’s attracting pension fund investors?

The survey identified a number of emerging ‘favourite’ themes among investors within each pillar of recognised ESG factors.

Within the environmental pillar, investments in climate change and carbon emissions programs remain the most popular (63%), followed by biodiversity (48%), water scarcity (42%) and finally waste management (36%).

In the social pillar, employee engagement and labour standards (57%) ranked supreme, followed by human rights (42%) initiatives, and data protection and privacy (32%).

In the governance pillar, executive compensation linked to ESG outcomes (61%) held primacy, followed by diverse board composition (57%), an independent audit committee structure (46%) and zero tolerance towards bribery and corruption (40%).

The list of criteria for selecting external managers for ESG investing has also grown, with survey respondents identifying a value-for-money fee structure (58%), followed by core ESG values embedded in corporate culture (56%). On the ‘differentiators’, value creation activities like a track record in delivering clients’ ESG goals (67%) as well as in stewardship and proxy voting (65%) are regarded as key priorities.

Co-authored by UK researcher CREATE-Research and French wealth management giant Amundi, the report is based on responses to a survey from 158 pension plans globally.