Applying ESG to alternatives is tricky, reveals IPE survey

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EUROPE - Integrating environmental, social and governance (ESG) issues into alternative asset classes seems to be difficult, the findings of an IPE survey suggest.

Less than a quarter of the poll’s pension fund respondents said they apply ESG criteria to their entire portfolio. Around 27% said they had no ESG strategy, while the majority - around 48.5% - applied an ESG strategy to between 2% and 95% of their portfolio.

Integration mainly takes place via mandates and manager selection, respondents said, but ESG strategies for alternatives seemed to be the exception rather than the norm.

“[It is] very difficult to implement ESG in alternative investments as most managers do not have an ESG policy yet or only look at environment (energy savings) and not the other criteria,” admitted one Dutch fund.

Other respondents stated their alternatives were not yet covered, while some opted for managers with ESG criteria.

“Our fund of funds private equity manager insists all funds we invest in sign up to responsible investment principles,” said one UK scheme. “Our fund of fund property manager insists all funds we invest in report energy usage in some way.”

An Icelandic pension fund executive also added: “We ask if [the] managers have implemented ESG/PRI [and] let the managers know we have signed the UN PRI. [But] as for now, we do not exclude them if they have not implemented ESG.”

Another Dutch fund conceded that SRI was not yet applicable to his real estate portfolio but said it had niche fund investments in microfinance.

“We integrate ESG in almost all of our investments, alternative or not,” said a third Dutch fund. “[But] we have a problem with some managers [as] ESG is more expensive than non-ESG investments. This should be the other way around. And what is more, it is not possible at this moment to integrate ESG in passive investment strategies. This must change as well.”

A total of 42 pension funds with combined invested assets of €197.6bn responded to IPE’s latest Off the Record survey. Further details will be published in the October edition of IPE magazine.

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