Last year’s strong bear market affected a wide range of investment strategies, and ESG was no exception. However, the lower profitability is considered a temporary setback, not an irreversible trend. ESG investing remains critical for long-term value creation in this era of global warming and social inequality, according to a new report published by CREATE-Research and Europe’s largest asset manager, Amundi.
The report is based on responses to a survey of 158 pension plans around the world, managing assets worth €1.91 trillion. It aims to shed light on how ESG investing will evolve following the exceptional events of 2022.
Appetite for ESG among pension plans remains strong despite the market decline in 2022. 2022 saw rising global inflation and the Russian invasion of Ukraine, which roiled capital markets. ESG investing suffered from the resulting market declines, reminding investors that it is not immune to market trends. 63% of respondents experienced untimely sector investments as energy stocks trumped decarbonization goals and 53% are concerned about the political backlash to ESG issues in the US, the world’s largest fund market,
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However, the consensus is that, as a strategy, ESG will be marked by periodic setbacks due to larger dynamics that have little to do with ESG investing per se
The majority of respondents (79%) believe that ESG factors will not harm long-term performance. As a result, appetite remains strong and ESG investing will continue to deepen its roots in the pensions landscape. Over the next three years, 53% of respondents expect the proportion of ESG investing in their active portfolios to increase, and 49% expect it to increase in their passive portfolios.
According to Vincent Mortier, Chief Investment Officer of the Amundi Group: “Even the most casual observer of the markets will know that 2022 was a difficult year, but despite the impact on ESG strategies, it is encouraging to see so much optimism from institutional investors. “This year’s survey reveals a positive outlook and strong ESG appetite from pension plans, and we should not underestimate the power of this group to move the needle when it comes to making an impact.”
ESG should not be considered philanthropic funding. A distinctive feature of the evolution from socially responsible investing to ESG investing is the dual emphasis: making money while also making a difference for society at large. According to one respondent, “we want to see clear evidence that our ESG investments perform well financially and do good socially.” For their portfolios to achieve this duality, our respondents have highlighted two sets of objectives.
The first group refers to the fundamentals of investment: minimizing risks related to ESG factors (57%), increasing the profitability of related opportunities (53%), seeking a double benefit through social and environmental profitability, as well as financial (51%) and reduce portfolio volatility (34%). In particular, only 14% are willing to achieve ESG objectives at the expense of portfolio profitability.
The other group refers to secondary issues, such as trade-offs between pillars E, S and G (49%) and the reduction of operational and reputational risks (34%).
Professor Amin Rajan of CREATE-Research, who led the project, highlights: “ESG investing has evolved: we are now seeing the emergence of a more robust version focused on real-world outcomes and responsibilities, as well as “This change marks a decisive moment in the next stage of ESG investing and highlights its firm place at the center of pension portfolios.”
The changing ecosystem of capital markets and climate policy measures drive ESG investing. There are several forces driving ESG investing among pension plans, such as the changing nature of capital markets and climate action policy. Capital markets are evolving and profits are no longer the only goal.
Companies must promote the interests of shareholders, as well as employees, customers and communities. The dominant avenues used by pension plans to enhance stakeholder interests are stewardship1 and proxy voting (68%), investing in best-in-class companies with high or improving ESG scores (56 %), integrating ESG factors into the investment process (52%), excluding companies with poor ESG ratings (41%) and impact investing (35%).
Climate action policy is another powerful tailwind. Two recent political game-changers are the Inflation Protection Act in the US and the “Fit for 55” program in the EU. Industry collaboration initiatives such as the Net Zero Asset Owner Alliance and the Net Zero Asset Managers Initiative are likely to provide further impetus. Currently, one in two pension plans have a net zero strategy and another in four report that they are “working on it.”
According to Monica Defend, Director of the Amundi Investment Institute: “In the last 12 months, we have seen the announcement of a number of new regulatory and policy initiatives around the world, such as the IRA in the US, and the RePowerEU Plan and the Net Zero Industry Act in Europe – Governments and regulators play an important role in driving ESG investing – from increasing transparency to helping markets.”
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First published in Funds&MARKETS. A third-party contributor translated and adapted the articles from the originals. In case of discrepancy, the originals will prevail.
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