Pension investors increasing focus on ESG following Covid-19 performance

More than three quarters (76 per cent) of pension investors are keen to increase their environmental, social and governance (ESG) allocations following the pandemic, according to a joint survey by Amundi and Create-Research.

The research found that the Covid-19 pandemic had “vividly exposed” income and social inequalities, with Amundi emphasising that sustainable economies that deliver good investment returns need sustainable societies.

The focus on social issues, in particular, has increased, with almost two thirds (59 per cent) of pension investors keen to increase allocations specifically to the social pillar over the next three years.

In addition to this, the survey found that whilst 67 per cent of respondents cited the primary target of their ESG investments as good risk-adjusted long-term returns, they also wanted to see some tangible evidence that their allocations are delivering meaningful and material impacts on the ground.

Indeed, the research suggested that the criteria used to select external managers has also become more varied in the “topsy-turvy post-pandemic world”, with around 76 per cent of respondents citing the capacity of ESG integration as a key consideration when awarding new mandates.

In addition to this, 50 per cent viewed thematic investing more broadly as a key capability, while 63 per cent prioritised capabilities around end game deliverables, and 52 per cent looked for a deep understanding of liability-driven investing and balance sheet management.

A further area of key consideration in awarding mandates was the ability to "survive and thrive" in an environment where asset valuations are at all-time highs and where liquidity can evaporate in an instant.

Given this, around 49 per cent of respondents were looking for an edge in liquidity management in periods of high volatility, while a further 49 per cent cited a deep understanding of return drivers while markets are distorted by central bank action.

An additional 44 per cent said that they were looking for an edge in tactical asset allocation in response to time-varying asset class correlations.

However, the research also suggested that pension investors have been obliged to take more innovative approaches to their asset allocation as insurance-based solutions have become increasingly out of reach, with portfolios divided into three ‘buckets’: return-seeking assets, hedging assets and cross-over assets.

In relation to return-seeking assets, which typically cover equities, the survey found that the majority (63 per cent) of respondents favoured global equities, while 57 per cent cited emerging market equities and 43 per cent had looked to European equities.

It also revealed that cross-over assets are becoming increasingly important, suggesting that their equity-like returns and bond-like features aim to provide capital upside for plugging plan deficits, regular income for pension pay-outs and inflation protection for funding benefit indexation.

In particular, the most favoured asset classes included infrastructure, cited by 59 per cent of respondents, followed by real estate and private equity, which were cited by 59 per cent and 48 per cent of respondents, respectively.

Commenting on the findings, Amundi group chief investment officer, Pascal Blanqué, said: “Asset class returns and correlations have become time varying. Going into risky assets is not the best option for some plans, but it is, unfortunately, their only option. This is not how the end game was meant to be.”

The research also suggested that a number of European defined benefit pension schemes are in a catch-22 situation.

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