Pension schemes considering climate change risk sees 40pp jump – Mercer

The proportion of European pension schemes that consider climate change risk on their investments has increased by 40 percentage points year-on-year, according to Mercer.

The consultancy firm’s latest European Asset Allocation Insights survey of 927 institutional investors revealed that 54 per cent of those surveyed no actively consider the impact of such risks on their investments allocations, compared to just 14 per cent in 2019.

Through its regular Investing in a Time of Climate Change report, Mercer has been engaging with clients on this topic, and the firm expects the trend to continue as more schemes consider the potential portfolio impacts of climate change over the coming years.

Mercer’s research also found that the overwhelming majority (89 per cent) of schemes surveyed now consider wider environmental, social and governance (ESG) risks as part of their investment decisions, up from 55 per cent in 2019. While regulation continues to drive investors’ concern with ESG risk (85 per cent), Mercer’s research shows that a growing number are driven by the potential impact on investment returns (51 per cent, up from 29 per cent).

Forty percent of schemes also cited the desire to mitigate potential reputational damage as a reason to consider ESG risks, and 30 per cent noted the wish to align with the sponsoring company’s existing corporate responsibility strategies.

Commenting, Mercer European director of strategic research, Jo Holden, said: “It is encouraging to see such a strong increase in ESG risk awareness, including the potential impact of climate change, on the part of institutional investors. It has long been our view that these factors should not be afterthoughts, but rather actively considered in all investment strategy decisions.

“To enable long-term mindset changes however, investors must realise the value for themselves. We can see this awareness emerging as more schemes and company sponsors witness how ESG risks in their portfolios may impact investment returns and how the company and scheme is perceived by the public.

“Investor portfolios can often be improved from an ESG perspective with only relatively minor steps, for example there are quick wins to be made by switching out a relatively small proportion of investments. We encourage schemes to consider developing a climate transition schedule for their portfolios and adopting responsible investment indices.”

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