- Despite improvements since 2016, the vast majority of responding funds still not active on climate
- 28% of respondents now cite financial materiality as driving ESG integration
With NASA stating that April 2017 was the second hottest since records began in 1880 (with 2016 the hottest), Mercer’s recent European Asset Allocation Report has found that only 5% of 1,241 European Pensions schemes have considered the investment risk posed by climate change. The consultancy has called for more urgency from the industry to address the issue.
The 2017 report – the 15th edition - gathers information from 1,241 institutional investors across 13 countries, reflecting total assets of around €1.1 trillion. As well as investment strategy information, the report tracks the drivers behind Environmental, Social and Corporate Governance (ESG) integration and two key areas within responsible investment: investor stewardship and active ownership rights and, secondly, the investment risks and opportunities posed by climate change.
According to Phil Edwards, Mercer’s Global Director of Strategic Research, “The report findings highlight the need for the industry as a whole to do more; it’s ironic that the pace of response to this enormous issue is best described as glacial, outside a small group of leading funds. The Paris Agreement, which came into force in November 2016, has set an ambitious target to keep global warming well below 2˚C above pre-industrial levels, with a stretch target of 1.5˚C. It provided a strong signal as to the long-term direction of climate related policy; investors must therefore consider the potential financial impacts of climate change on their portfolios. Inactivity by pension schemes brings risks from stranded assets and physical climate risks, as well as reputational concerns. A proactive approach can open up investment opportunities in the green fields of the low carbon economy.”
According to Mercer’s 2016 European Asset Allocation Report, only 4% of respondents had considered the investment risks posed by climate change. That there is some improvement in 2017 is encouraging but given the scale of the potential effects and the small increase, the consultancy is calling on Trustees to begin prioritising the issue, at the same time recognizing its own role in educating Trustees on this issue.
In 2015, ahead of the global climate negotiations in Paris, Mercer published Investing in a Time of Climate Change, a report outlining four plausible climate change scenarios (considering warming levels by the end of the century from 2˚C to 4˚C) and the impact that each scenario could have on investment returns. The report found that the biggest impacts were under a 2˚C scenario and crucially long-term investors could position their portfolios for such a scenario without materially reducing expected returns.
Mercer’s European Asset Allocation Report found that there has been a gradual increase in the number of European pension schemes factoring environmental, social and corporate governance issues into their investment process. Financial materiality was the main driver behind this trend, cited by 28% of respondents in 2017 compared to 20% in 2016. This was followed by reputational risk, cited by 20% in 2017 compared to 16% in 2016. The report also found that around 20% of asset owners integrate ESG risks into their investment beliefs and policy with 22% of those surveyed having a standalone responsible investment (RI) policy.
The report also asked participants how they act as active owners (exercising voting rights in pursuit of good corporate governance) to meet their stewardship obligations. Twenty-eight percent of asset owners consider ESG and stewardship as part of the manager selection and monitoring process. This was up from 22% in 2016. Furthermore, 29% of asset owners request that their advisor monitors stewardship issues on their behalf, up from 20% from 2016. There has also been an increase in expectations for disclosure, with 9% of asset owners reporting on their stewardship activities publicly (up from 6% last year). Mercer continues to anticipate growth in public reporting by asset owners.
According to Kate Brett, senior RI specialist, “The increase in asset owners citing financial materiality as the driver behind considering ESG risks is a positive development for the market - asset owners simply cannot afford to dismiss ESG risks as non-financial. Regulators are increasingly clear that asset owners should be considering all risks that may be financially material, including ESG related risks and longer-term risks such as climate change – proactive consideration of these issues is absolutely consistent with fiduciary duty. The forthcoming recommendations of the Financial Stability Board’s Task Force on Climate Related Financial Disclosures are likely to help drive further focus on climate risk management by asset owners.”
Notes to Editors
Chart 1: Key drivers behind the consideration of ESG risks
Note: Please note that options are not exclusive, with some asset owners motivated by a combination of reasons.
Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and careers of their most vital asset – their people. Mercer’s more than 20,000 employees are based in 43 countries and the firm operates in over 140 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global professional services firm offering clients advice and solutions in the areas of risk, strategy and people. With annual revenue of $13 billion and 60,000 colleagues worldwide, Marsh & McLennan Companies is also the parent company of Marsh, a leader in insurance broking and risk management; Guy Carpenter, a leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a leader in management consulting. For more information, visit www.mercer.com. Follow Mercer on Twitter @Mercer. In the UK, Mercer Limited is authorised and regulated by the Financial Conduct Authority.