GLOBAL - Institutional pension funds invested at least $1.26trn (€810bn) under responsible investment (RI) terms in 2007 but expect to apply environmental and social governance (ESG) to at least 75% of their assets by 2010, according to a study conducted by Investment and Pensions Europe (IPE) and Responsible Investment (RI) Magazines.

A detailed study of Responsible Investment Landscape for 73 European and North American pension funds - with total assets of $1.583trn between them - found around 45% of the assets carry ‘engagement' regarding RI criteria, but at least 41% apply negative screening to their assets - leaving certain investments or firms out if they do not meet their ESG policy.

Interestingly, 53% of those funds not yet applying RI strategies said they are more likely to consider a focused assets approach - investing in thematic investments such as clean energy, climate change, waste, water - while approximately 35% would apply negative screening.

Over 70% of funds adopting RI do so by outsourcing some or all of these assets to third-party managers, while over 80% of those assets are outsourced, and the majority of these are again through segregated mandates.

In contrast, where the assets are managed in-house, a much smaller sum carries ESG characteristics as less than 45% of assets are committed to an RI policy, the joint IPE/RI study revealed.

The question of whether pension funds in the UK, for example, investing under RI criteria is driven not necessarily by concerns over fiduciary responsibility, suggested a debate, hosted by IPE and RI, accompanying the survey's release.

Aled Jones, manager of responsible investment at the Pension Protection Fund (PPF), noted the role of investment advisers is "crucial" when tackling RI, as trustees in the UK "rely quite heavily" on the advice of investment consultants but the shift to including ESG still has some way to go.

"There seems to be increasing expertise in [investment consultant] organisations. However, whilst they are proactive on suggesting some things, it seems to be that advisers generally still react to questions that trustees ask. So then it really comes down to what trustees know. If they do not know what to ask then they are not going to ask anything and it is a bit of a dead end," said Jones.

The study found only 60% of respondents to the survey use consultants to help in their selection of SRI managers, but this may also be in part because the larger investors - such as APG and USS - are more likely to employ in-house expertise.

Moreover, while some pension funds (24%) do see RI as part of their fiduciary responsibility and 78% have explicit policy statements on ESG, approximately 38% found it was not possible to apply principles all of the time because of issues related to investment performance.

That said, 45% of those questioned said integrating RI criteria has had a positive effect on investment returns, while a further 45% said it was too early to tell, and 6% said it had a negative impact.

Among the investment themes, it was found just 6% of are involving in carbon trading, but over two-thirds are investing in clean energy, at least 57% are in clean technology, 45% of funds are investing in climate change, 39% are in water-related investments and 35% are investing in infrastructure.

The bulk of ESG also relates to listed equities - Dow Jones sustainable and FTSE indices being the most popular benchmarks - but RI criteria is also being applied to fixed income among 37% of those questioned.

However, 34.25% of respondents said they have no active policy regarding the use of their shareholder voting rights.

Those who do use their shareholder vote tend to apply it to domestic shares while over 40% apply their vote through third-party asset managers.

Those questioned say they anticipate take-up of RI policy will be driven by "external pressures" but domestic and international regulation and legislation is likely to play a key role is its growth, along with ‘supranational' initiatives, such as the UN Principles of Responsible Investment, which now represents assets worth €13trn.

Further details of this survey are available this week in a special supplement of IPE.

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