A Eurosif study shows a lack of knowledge among European corporate pension funds is hampering greater adoption of ESG factors in their investment strategies, writes François Passant
As European regulators prepare to launch new recommendations on sustainable and responsible investment, European corporate pension funds are already taking important steps towards integrating ESG factors in investment decisions.
According to the 2011 Corporate Pension Funds & Sustainable Investment Study by the European Sustainable Investment Forum (Eurosif), 56% of surveyed corporate pension funds have an SRI policy in place today and about a quarter of those without an SRI policy intend to have one in the coming year. There is no single reason why nearly half of funds surveyed do not have an SRI policy. The reasons given range from risk and performance concerns, to lack of familiarity with the issues, to lack of resources to deal with such a policy.
For the first time on this scale, it has been shown that the inclusion of ESG factors in the investment philosophies of European pension funds is, overall, becoming mainstream with such high percentages of European pension funds already having or planning to have an SRI policy in place. Certainly, there is still a long way to go but the study shows that a majority of pension funds take their fiduciary duty seriously. The debate thus moves from whether or not a pension fund should have an SRI policy, to how to design the most appropriate SRI policy.
Although corporate pension funds believe that having an SRI policy is part of investors’ fiduciary duty (66%), only about a quarter of the survey respondents without one today said they plan to implement one in the coming 12 months. This means, according to the report, that a small number of pension funds are, in their own estimation, not fulfilling their fiduciary duty by failing to have an SRI policy.
A majority of the study respondents (60%) feel that environmental, social and governance (ESG) factors affect long-term performance, with governance being the most important ESG factor they look at when designing an SRI policy. For Belgium, Germany and Norway, the three ESG factors are of equal importance, whereas funds in the Netherlands, Switzerland and the UK, for instance, find that governance is most important.
The study shows that for those funds with an SRI policy, 58 of the 94 respondents (62%) delegate it to fund managers, while 46 (49%) manage it in-house. Only 16 respondents said they use engagement overlay or proxy voting service providers.
In creating SRI policies, European corporate pension funds receive the most meaningful input from the pension fund boards. Furthermore, 85% of the study respondents state that the CSR/ sustainability policy of the funding company is a significant input for the formulation of SRI policies. The report therefore states that, in designing SRI policies, gaining the support of pension funds boards and consulting the CSR/ sustainability policies of the funding companies can be very useful starting points.
The views of the pension fund members or beneficiaries are also a very important input for corporate pension funds in two of the surveyed countries (Austria and Switzerland).
Equities, bonds and real estate are the most popular asset classes in the implementation of SRI policies, the report shows. This is not a surprising finding, since these asset classes typically represent the largest portion of pension fund assets. Many of the SRI strategies in the equity portfolio can be easily applied to bonds and therefore it seems natural that the majority of the SRI policies extend to the bond asset class.
The third most popular asset class covered by SRI policies is real estate/property. Investor attention for sustainability within this asset class is growing rapidly, as can be seen by the founding and ongoing research of the Global Real Estate Sustainability Benchmark and the expected launch of the Global Reporting Initiative (GRI) Construction and Real Estate Sector Supplement (CRESS) for standardised reporting on sustainability within this sector.
Another finding of Eurosif’s study is that although investors’ role in the commodities market has received a lot of media and political attention, only 7% of the study respondents have an SRI policy that covers this asset class. Looking beyond the average, however, it is noteworthy that a higher proportion of pensions funds in countries where investment in commodities is traditionally higher - such as Switzerland, Sweden, the Netherlands or Norway - have implemented an SRI policy for this asset class. The same comment is valid for alternative/hedge funds where, on a European level, only 30% of corporate pension funds have an SRI policy for this asset class.
The three instruments most commonly used for SRI policies implementation in the EU are voting, negative screening and integration, with country variations. Voting is widespread among Spanish, Dutch, and British funds, while negative screening is frequently used in Austria, Spain, and Sweden. Engagement is most common in Austria, the UK, and the Netherlands.
Regarding the extent to which corporate pension funds report on their sustainable investment policies, the study shows that there is a reluctance to share SRI policies. The majority of pension funds seem more willing to share their SRI activities with the board and their members than externally.
This study provides a first European-wide benchmark for the adoption of SRI policy by corporate pension funds. It reflects, to some extent, cultural, regulatory and asset allocation differences across European countries. It also highlights the need to continue to educate pension funds and other institutional investors about the merits of socially responsible investment, as lack of knowledge has been identified as a key barrier to adoption.
Finally, it stresses the need to think about how to expand SRI policies into multiple asset classes, beyond equities and bonds. All these represent key efforts to which Eurosif hopes to contribute.
Created with the support of DB Advisors (Deutsche Bank Group) and HSBC Global Asset Management, Eurosif’s 2011 Corporate Pension Funds & Sustainable Investment Study was based on a survey of 169 respondents from 12 EU Member States
François Passant is executive director of Eurosif