Ongoing regulatory change in Europe is spurring more advanced environmental, social, and governance (ESG) strategies in the pension space, but a lack of suitable products is seeing larger schemes create customized mandates, according the latest Cerulli Edge―Global Edition.

“With institutional investors seeking more sophisticated strategies, customized solutions represent an opportunity to tailor portfolios to savers’ ESG criteria,” says Justina Deveikyte, director of European institutional asset management research.

Across Europe, the ESG space is maturing, with growing complexity, heightened scrutiny, and a pressing need for new products. Clear ESG integration and a decent level of stewardship are now the baseline for strategies and institutional investors are seeking to differentiate their approaches to sustainability by considering impact and risk management as separate areas of focus.

An increasing number of pension schemes are turning to customized solutions to meet burgeoning ESG demand and to reduce the risk of greenwashing products being included in portfolios. The tailored and customized solutions offered range from modified off-the-shelf products to new portfolios built from the ground up.

One fiduciary manager told Cerulli that, at one time, clients would look to customize their solutions to add ESG factors, but that fiduciary managers are beginning to offer responsible investment themes as standard.

“Clients can now choose the standard solution that incorporates thematic ESG or advanced customization, which goes a step further and includes impact investing,” says Deveikyte. “The move to a standardized solution incorporating ESG criteria was achieved by looking at existing asset classes to see how they can be thematically changed, but without an increase in cost or a reduction in returns.”

The most promising customization trend stems from new data and risk modeling practices that quantify the financial risks of the transition at the portfolio level.

The cost of a customized approach makes it inaccessible to most schemes, but asset managers and consultancies have spotted an opportunity to create intermediary products that can serve investors with similar ESG alignments.