SRI on the rise among pension funds

The majority of experts (60 percent) believe pension funds will include SRI criteria more in their investment decisions. However, this overall average masks unusually wide country specific discrepancies. While, almost 90 percent of the French respondents are optimistic about the future implementation of SRI approaches and the Dutch (80 percent) and Italian (62 percent) experts share this optimism, their German and Swiss counterparts (54 percent and 46 percent respectively) are more reserved and feedback from the United Kingdom was vague – slightly less than a third expect the importance of SRIs to increase in British pension funds.

To date, SRI has mostly been involved in equities, analyzing the extent in which listed companies address environmental, social and governance concerns, however, the majority of experts expect that it will be extended to other asset classes such as bonds, real estate or private equity. Looking by country, this is expected by 87 percent in France, 77 percent in the Netherlands, 57 percent in Germany, 54 percent in Switzerland and exactly half of the British experts. Italians on the other hand are more sceptical with only slightly more than one third believing the scope of SRI will increase.

The active ownership of pension funds – that is, exercising shareholder rights and monitoring management – is widely expected to increase in importance. Around 60 percent of Italian, Swiss and British experts are predicting this, with considerably more in the Netherlands and in France. Germany is the exception. With 37 percent of those surveyed in Germany are expecting pension funds to become more active owners in the companies they are investing in.

The SRI field has generated a broad array of concepts and approaches. While, the main categories of concern are environmental, social and governance (ESG), there is, as yet, no general consensus on how these criteria should be weighted. This survey therefore explored their relative importance and reveals that experts believe that environmental criteria play the most important role (81 percent). Similarly, almost 70 percent of experts consider both corporate governance and social concerns to be important criteria. In contrast, only a third of experts believe ethical or religious-based investment approaches will play an important role. The outlook is brighter for thematic sustainability funds. On average, 69 percent of experts surveyed anticipate these types of investments to grow in importance.

The author of the survey, Alexander Boersch, explains: "While socially responsible investing has its roots in values-orientated approaches, they have now lost their importance and our survey shows that pension experts believe that ESG factors rather than ethical or religious-based investment approaches will play an important role for pension funds."

The survey results show that external stakeholders (trade unions, governments or public opinion) are given the most credit for the trend in pension funds investing in SRI, with the key driver being public opinion followed by trade unions. Public opinion is considered to be the single most important factor driving SRI (78 percent on average). In comparison, 64 percent see trade unions and 46 percent governments as important drivers of demand for SRI.

Given the positive general outlook for SRI, surprisingly few experts believe SRI will be driven by the expectation of higher returns or lower risk – two of the leading arguments in its favour. On average, only 17 percent believe an expectation of higher returns is driving SRI. Again, the French are the most favorable (20 percent). While there is a wider belief that risk reduction will drive SRI, with an overall average of 24 percent (high: 40 percent in France; low: 6 percent in the United Kingdom) it is still quite muted.

The comparatively low importance that the experts grant to risk and return considerations contrasts with the results of a landmark study² by risklab, a subsidiary of AllianzGI, which underpins the value add of SRI or environmental, social and corporate (ESG) in a portfolio context. The experts of Risklab show in their study that a focus on ESG factors can significantly reduce portfolio risk for a given level of expected portfolio return or enhance returns for a given level of portfolio risk. The study demonstrates that in the long-term, over 20 years, ESG factors are expected to have significant tail-risk impact on equity investments and consequently on investors' portfolios. The risk impact is amplified even more when comparing more risky portfolios e.g. when the equity allocation is even higher.

Brigitte Miksa concludes: "The results of the risklab research are intriguing as while many institutional investors, especially large European pension funds, have adopted ESG investment strategies in recent years, industry surveys, such as ours, reveal uncertainly among professionals about the risk/return effects of ESG investing. While the risklab study will certainly not end short-term performance debates, it will enhance discussions by showing significant portfolio risk reduction or return enhancement can be achieved by allocating equity investments into companies that proactively deal with ESG risk factors over an extended timeframe."

 
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