A large share of German pension investors (94%) outsource the implementation of their environmental, social, and corporate governance (ESG) targets to asset managers, according to the study “Pension risk and investment of pension assets 2021,” conducted by Willis Towers Watson.

Pension investors tend to consider sustainability as part of mandates rather than as an aspect to integrate across portfolios, it added.

It would make more sense for pension investors to approach the topic of sustainability with a comprehensive strategy and consider sustainability risks as a whole, said WTW’s head investment consulting and author of the study Tobias Bockholt.

Investors, according to Bockholt, can choose between three options to set the course towards sustainability goals, including selecting sustainable investments, for example in mobility, agriculture and forestry or renewable energies; engagement with investee companies to accelerate the process of exiting carbon; and change of mandate, meaning the exclusion of investments causing damage to the environment, or the use of benchmarks such as low-carbon indices.

The process of investing pension capital will become more and more complex in the future, Bockholt said, adding that in the long-term “pension investors should increasingly rely on illiquid investments in their portfolios and, in particular, take advantage of market opportunities with short-time windows.”

A more diversified portfolio

The portfolios of German pension investors are broadly diversified, compared with the split seen in the past years, with the bonds allocation, which has been continuously reduced, from 59% last year to 53% this year.

Among regulated investors such as Pensionskassen, Pensionsfonds and Versorgungswerke, the allocation to alternatives has grown from 9% in 2020 to 11% in 2021; to equities has increased from 19% to 20% year-on-year this year; whilst the allocation to real estate has remained flat at 12%.

With unregulated investors such as Contractual Trust Arrangements (CTA), instead, there has been an increase in the allocation to bonds from 45% in 2020 to 57% this year, with the allocation to equities also going up from 26% to 29% , while alternatives investmetns went down from 11% to 5% and real estate from 14% to 4% year-on-year in 2021.

For the first time expected returns of regulated pension investors were on par with the expected returns of unregulated investors to an an average of 2% on target returns of 2-4%.

“Regulated pension investors have expanded alternative and illiquid investments [but] there is still a lot of catching up to do,” said Bockholt.

Private equity continues to play an important role among alternative asset classes as preferred by investors. WTW said that, however, niche strategies may pay off to achieve returns, for example investments in China A-Shares or Bank Capital Relief Trades.

The study analysed 36 institutional investors including foundations, CTAs, Pensionskassen, Pensionsfonds and Versorgungswerke with total assets worth €130bn.

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