Irish pension funds are lagging funds in other countries when it comes to taking into account environmental, social and governance (ESG) issues in investment decisions.

According to Mercer’s European Asset Allocation survey, 69 per cent of Irish pension funds consider ESG issues in their investment decisions, which is less than the European average (76 per cent). Compared to other markets, it is lower than the UK (84 per cent), Germany (88 per cent) and Spain (92 per cent).

Furthermore, in prioritising the relative importance of ESG issues, Ireland was the only country where investors didn’t rank environmental as the most important ESG component, ranking it second behind governance issues.

Commenting, Mercer Ireland responsible investment lead, Rob Meaney, said: “The pandemic has caused a lot of investors to wake up to how the elements of ESG are connected. Although environmental issues continue to remain a key focus, social issues such as human rights and social equity are now much higher up on the agenda, in part due to the impacts of the pandemic.”

“Trends in Ireland are slightly lagging European norms... The research showed that a large majority of European investors integrate ESG into all aspects of their operations including investment manager selection (83 per cent), investment manager monitoring (88 per cent), reporting (79 per cent) and asset allocation (64 per cent).

“Mercer’s survey also indicated that investors are moving from a more reactive position to a proactive one, with regulatory drivers decreasing in significance as a motivator for considering ESG risks (67 per cent cited this as a key driver, down from 85 per cent last year).”

In addition, the report also showed a continued reduction in the allocation to equities and alternative investments in Irish defined benefit pension schemes. This year 23 per cent of assets were allocated to equities, compared to 27 per cent in 2020. Bonds have been the beneficiaries with the allocation rising to 58 per cent from 50 per cent last year, as investors seek to protect against volatility and act on concerns related to high valuations in equity markets.

The reduced exposure to equities is part of a longer-term shift in asset allocation, Mercer said. Looking back five years to 2016, equities accounted for 36 per cent of the typical Irish defined benefit portfolio, with 49 per cent in bonds. Allocations to alternative investments have seen a material increase over this period, reflecting the diversification benefits offered.

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