Influential pension fund survey says 61% to up ESG integration as long-term investing returns

Time in the market now outweighing market timing in investor strategy approaches.

A pan-European survey of 161 pension plans with total assets of €1.71 trillion, carried out by Create-Research, the influential research outfit with pension funds run by Professor Amin Rajan, has found that 61% of respondents expect their attention to ESG factors in investment to rise amid a recalibration of institutional investment to long-term time horizons, while 39% said it would remain the same, and none saying they would do less. The ESG shift would be considerable given that only 36% of respondents said they had an ESG approach currently.
Create said respondents told them ESG research would increasingly be used to manage long-term risks that are ‘unfamiliar’ to conventional risk models. It said ESG factors were being integrated into both top-down country allocation and bottom-up security selection as a result. A significant 44% of respondents said they expected long-term investing to rise, 48% expected it to remain unchanged, and 8% expected it to fall.
The survey of both DB and DC plans in Europe was followed up by interviews with 30 senior pension executives to obtain more detailed insights.
Create said the context of the long-termism re-adjustment included the winding down of quantitative easing by central banks, a return to inflation and the effects of 25 years of ‘turbo-charged globalisation’, particularly in terms of inequality, political populism and environmental consequences, notably climate change.
Consequently, it said pension funds feared volatility spikes and were aiming to build portfolios resilient to fat-tail events and that could capitalise on periodic marketdislocation and use bottom-up asset picking to add value in an economy where quality and durable company earnings would be key. It said ‘time in the market’ would now be more important than trying to ‘time the market’. The emphasis, pension funds said, was now on remaining invested in quality assets so as to ‘gain more by losing less’ and outperforming over a full cycle.
In terms of the ESG shift by pension funds, the survey respondents said they were at different phases of implementation: 24% said they already had a ‘mature’ ESG portfolio. A further 28% say they now in the ‘implementation’ phase, while 19% said they were ‘close to decision making’ and 29% still at the ‘awareness raising’ phase.
In terms of the recalibration towards long-term investing, respondents said they expected their asset managers to deepen and broaden investment expertise and identify and manage new risks while stress testing investment strategies over multiple scenarios and time horizons. They also expect clear improvement of alignment of interest on fees and charges that reflect value added.
In terms of the likely shift in investment strategies as a result, the respondents said these would include more real assets (72% indicated a rise), theme funds (e.g. ESG) (52%), alternative investments (50%), and bottom-up asset picking (47%).
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