Asset managers who cannot show serious results from their engagement efforts with listed companies are struggling to win business from pension funds, according to a new survey from consultancy bfinance.
According to a survey of 170 pension funds around the world, 53% of participating plans are unlikely to hire an asset manager who cannot demonstrate engagement success.
Additionally, four out of 10 funds require asset managers to show at least one example of divestment for ESG reasons.
The survey also confirms the rise of impact investing as a central theme for pension funds. More than half of pension funds said they were unlikely to hire a manager who could not report on the impact of their investments, for example on the United Nations Sustainable Development Goals.
This figure is considerably higher for pension funds than for other investors (insurers, endowments and family offices) who also participated in the survey (see chart below).
“Answers to questions related to impact are particularly compelling, given that finance-focused investors have historically found it harder to engage with this topic than with more risk-focused ESG topics,” said commented Kathryn Saklatvala of bfinance.
“European investors are significantly more active than their international counterparts, but there are considerable disparities between different European countries: we note a particular change in sentiment in Italy, where only 22% of investors have been involved in the investment of impact, but 44% are considering entering the space,” she added.
European investors are also pioneers in CO reduction2 emissions. While only 10% of US investors have formal carbon reduction targets, this figure rises to 37% for UK investors and 44% for Dutch investors.
Similarly, European investors are also more likely to require net zero commitment from their asset managers than investors from other parts of the world.
A whopping two-thirds of UK investors expect such a commitment, perhaps a reflection of the COP26 climate conference held in the UK, when the figure stands at just 31% on average.
Satisfied despite record losses
Despite losing hundreds of billions between them, participating pension plans are surprisingly pleased with their investment results this year. Those who are satisfied with their performance outnumber those who are dissatisfied by 56% to 44%.
The remarkably high satisfaction rate may have something to do with the funding situation of many pension schemes which has improved despite high investment losses thanks to rising interest rates, Saklatvala noted.
“Pension funds that have explicit liabilities are more likely than other asset owners to have seen a positive change in their funded position than a negative change,” she said.
Pension funds are even more satisfied with the strategies they have chosen (see chart below). This is likely due to the fact that they have increased their exposure to illiquid asset classes over the past few years, which they expect to continue to do over the next 18 months.
Unsurprisingly, pension funds are by far the most satisfied with the performance of their investments in infrastructure, private equity, private debt and unlisted real estate. Emerging market stocks and bonds are the only two categories where net satisfaction is negative.
Overall optimism about their performance and investment strategies is overshadowed by concerns about inflation, however.
As an anonymous Dutch pension fund put it: “I am very worried. Our pension obligations are in nominal terms, but retirees actually expect real income, which is far from possible with this big inflationary shock.