European Asset Owners Increasingly Want Proof That Asset Managers Have Embedded Sustainability Into Their Firm Culture
December 14, 2020 — London
Climate change continues to dominate the European responsible investment agenda, but social investing is on the rise
Cerulli Associates’ latest report, European Environmental, Social, and Governance Investing 2020: Leading the Global Revolution, shows that climate change is the most important environmental, social, and governance (ESG) topic in Europe. Nearly 77% of insurance companies address climate change explicitly in their responsible investment policies, as do 53% of the pension funds surveyed in the report. French, Dutch, and U.K. asset owners are more likely to address climate change explicitly in their responsible investment policies than their counterparts in Italy or Switzerland.
“Although climate change is the key topic addressed in many European asset owners’ responsible investment policies, not many set targets to reduce climate-related risks or report their performance against these targets,” says Justina Deveikyte, associate director in Cerulli’s European institutional research team and lead author of the report. Cerulli’s survey data shows that, on average, nearly 70% of European asset owner respondents do not set carbon-footprint reduction targets for externally managed portfolios. This percentage is lower in the Nordics, where around half of the asset owners we surveyed do not set such targets.
ESG capabilities are now integral to European asset owners’ manager selection. “The most important factor asset owners assess during their selection process is the level of integration of ESG personnel, because the effectiveness of ESG frameworks depends on it,” says Connor Bigland, an analyst in the European institutional research team and co-author of the report. “This factor reflects how well a manager has embedded ESG into their firm culture, which is of growing importance to European asset owners.”
The starkest difference between European insurers and pension funds when it comes to selecting an asset manager is in their views on integrating ESG performance into manager remuneration. For the pension funds Cerulli surveyed, it is the least important factor, but insurers placed it sixth of 11 factors. More than 45% of insurer respondents said that linking managers’ compensation to ESG performance is very important, compared to just 30% of pension fund respondents. None of the asset managers that took part in Cerulli’s research have developed a fee structure that allows them to link compensation to ESG performance.
Cerulli’s survey also found that 68% of insurer respondents and 63% of pension fund respondents plan to switch from passive to more active investment approaches to improve ESG integration over the next three to five years. Cerulli expects more demand for enhanced index approaches, which add layers of ESG capabilities to a traditional index tracker fund. These funds sit somewhere between traditional passive and traditional active strategies and any new entrants to the European passive market must offer customizable ESG indices if they are to be competitive.
Interviews and surveys:
Cerulli’s analysis is based on proprietary research, including more than 60 video conference interviews with prominent international asset managers, private banks, asset owners, service providers, and other players throughout 2020 on responsible investment topics.
We conducted two dedicated surveys for this year’s report: one of European asset managers and one of European insurers and pension funds.
• Asset manager survey: 20 asset managers with more than €4.8 trillion (US$5.5 trillion) in European assets under management (AUM) as of December 2020 completed our asset manager ESG survey.
• Asset owner survey: 160 institutional investors—62 insurers and 98 pension funds—managing more than €5 trillion in AUM completed our asset owner ESG survey. In total, 40 participants were from the U.K. and 20 each were from France, Germany, Italy, Switzerland, the Netherlands, and the Nordics.
In addition, we supplemented our research with survey data gathered for other Cerulli reports in 2020.
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