Pension fund boards remain concerned that an activist, ethical investment stance will damage return prospects, according to a survey conducted by IPE.
According to the Focus Group survey for the October issue of IPE magazine, 29% of respondents said the risk of negative publicity due to divestment was the biggest ESG risk facing boards – despite one respondent from Eastern Europe admitting it had divested from Russia for its being a “potential military threat” to its host country.
However, two-thirds of the pension funds surveyed – 35 in total, with nearly €1.2trn in combined assets – agreed that the greatest ESG risk facing a board was that of underperformance due to ethical investment decisions.
Only one of the respondents thought the risk of lower return due to ethical decisions and the public backlash from any such decision cancelled each other out.
One UK pension fund said: “At the end of the day, the vast majority of our members want their pension to be safe. ESG is a second-order issue.
“We incorporate ESG because we believe over the longer term it will provide better financial returns, but there will be short-term volatility.”
A Danish fund stated that integration of ESG and good returns went “hand in hand”, but added that, while it could live with the potential negative publicity, “lower returns means the board is not living up to its responsibility”.
Respondents were also asked if they had been subject to any pressure to amend investment policy, with 26% saying they had come under pressure from members and 34% saying they had come under pressure from external groups, such as NGOs.
However, of the 60% that said they had been approached, one in four said they had been approached by both members and NGOs.
The remaining 40% said they had not come under pressure from either outside groups or beneficiaries.
In light of a recent campaign calling on ABP to offload its Israeli banking holdings, following the example set by PFZW, the respondents were also asked whether they thought pension funds should ignore pressure and only look at financial reasons for investment – or whether they should reflect member wishes.
One-third of respondents said decisions should only be taken on investment grounds, while 27% agreed funds should accurately reflect the wishes of members.
Nevertheless, 9% of respondents said a regulator or governments should weigh in on such topics, spelling out what level of attention should be played to member concerns.
As far as divestment is concerned, one of the respondents, an Eastern European scheme, said it did believe in divestment in some cases.
“We decided that it was inappropriate to invest in [a] country that is hostile and a potential military threat to our country].”
For more details on October’s Focus Group, see the current issue of IPE