Pension funds to get tougher on ESG mandates

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Investment News New Zealand 03/12/2023

Investment News New Zealand

"More than two-thirds of investment managers were rated as ‘poor’ for environmental, social and governance (ESG) skills, according to a new survey of global pension funds.

The Create pension fund study, produced in association with French investment giant, Amundi, found fund managers have struggled to keep up with demand for ESG expertise from institutional asset allocators.

“Only 8% of asset managers are now rated as excellent, with a further 22% rated good, by our survey respondents,” the Create report says. “The remaining 70% are rated fair or poor. The gap reflects perceptions of widespread greenwashing that has invited intense regulatory scrutiny on both sides of the Atlantic.”

Fund managers pitching for ESG mandates will have to lift their game, the paper suggests, as institutional investors focus on “far more stringent” criteria centred on entry-level ‘qualifying’ factors and stand-out ‘differentiators’.

Pension funds now expect managers to prove a corporate cultural alignment with ESG, value-for-money fees, comprehensive reporting capabilities and strong technology chops just to make the first round of mandate beauty parades.

But short-list candidates will also have to demonstrate stewardship prowess, a “broad talent pool”, thought-leadership and thematic investing skills to win ESG-directed money.

“This applies to passive funds as well as active funds. After all, passives are forced holders of shares in the chosen indices: they cannot divest poorly performing shares,” the report says. “They are the ultimate long-term investors who can only improve the quality of their beta assets via stewardship and proxy voting.”

The Create survey of 158 funds across Europe, North America and Asia-Pacific with a collective €1.91 trillion under management also found pension asset owners expect to see:

- a tighter focus on “quality” following the 2022 market rout where ESG stocks suffered more than most;:

- regulatory and policy advances in the sector; and,

- ESG to advance further into portfolios.

Headed by Amin Rajan, the UK-based Create has published the global pension fund report with Amundi for 10 years on the trot.

Another recent study found pension funds – in the UK at least – have been “poorly served” by investment consultants in one key piece of the ESG agenda: climate change.

The EDHEC Climate Risk Institute report found consultants routinely underestimate the financial impact of climate change even at extreme temperature rises with a “puzzling degree of accuracy”.

If the investment consultancy sector has been soft on climate in exact measures down to the “hundredth of percentage point”, doom-centric forecasts at the other end of the scale are equally unreliable for financial modelling, the paper says.

Instead, pension funds (and other asset allocators) would be better-served by “a clear description of the huge degree of uncertainty surrounding the impact of climate change on asset returns”.

“Being cognisant of the degree of uncertainty in returns can in itself radically change an investment choice, and the make-up of a portfolio,” the EDHEC study says.

“And, as we have argued, there is no safe way to be wrong: the investment consequences of taking as certain the most severe damage projections are as severe as the results of over-optimistic strategies, and manifest themselves in terms of underperformance (as finance theory teaches, buying insurance requires giving up a risk premium).

“And investment professionals would be immensely helped in their portfolio-construction task if they were provided with the approximate relative probability of different climate outcomes: in this respect, as we have argued, climate scenarios are radically different from financial ones.”

The ’Portfolio Losses from Climate Damages: A Guide for Long-Term Investors’ was authored by Riccardo Rebonato, who doubles as EDHEC finance professor and scientific director at the group’s Climate Impact Institute." 

Copyright Investment News New Zealand


Pension funds to get tougher on ESG mandates