European pension schemes and insurers are adopting differing approaches to going green, with size and location among the factors at play, according to the July 2022 issue of The Cerulli Edge―Global Edition. Whereas some insurers and pension funds are divesting from assets that are not sustainable and working with asset managers to create new investment vehicles, others are opting not to sell their holdings, but instead engage with the companies. The thinking behind the latter approach is that divesting could result in the assets being owned by less engaged owners, resulting in potentially less change.

Despite these differences, decarbonization and achieving net zero are key goals for most institutional investors, according to Cerulli’s research. Nearly 92% of asset owners are committed or are planning to commit in the near term to reaching net zero. Furthermore, for 66%, an asset manager’s commitment to net zero is a very important factor when hiring.

The drivers for decarbonization and incorporating environmental, social, and governance (ESG) considerations into investment decision-making include mitigating risk, EU legislation, fiduciary duty, and reflecting stakeholders’ interests.

In terms of sustainable fixed-income strategies for European insurers, green bonds and sustainability-linked bonds are the most prominent investments.

When it comes to decarbonizing fixed income, insurers in the six countries covered by Cerulli’s research are taking differing routes. On average, 30% plan to restructure part of their fixed-income portfolio, whereas 53% plan to run their fixed-income portfolio to maturity.

Comparing specific countries, 48% of U.K. insurers plan to restructure part of their fixed-income portfolios, higher than in any of the other European markets analyzed. Conversely, 32% of U.K. insurers intend to run their fixed-income portfolios to maturity. Although 25% of the Dutch insurers are not sure whether they will restructure part of their portfolio or run it to maturity, several have made their ESG targets public. Although decarbonization is an important theme for insurers in Switzerland, 70% expect to run their fixed-income portfolios to maturity.

“Cerulli’s research indicates that insurers’ response to decarbonizing fixed income can be segmented by size of company and location. Smaller companies are not under as much scrutiny as larger companies, resulting in less urgency to decarbonize,” notes André Schnurrenberger, managing director, Europe, at Cerulli Associates.

The support asset managers are offering asset owners can also vary. In some markets, asset managers are building strategic partnerships and taking a proactive approach when working with asset owners. For example, several UK asset managers note that insurers are looking for ESG assets as part of a refresh, because the repricing of assets exposed to climate risk is putting pressure on insurers. With regard to assisting asset owners to meet their fiduciary duty, some asset managers are placing increased pressure on companies to align with a green transition and for decarbonization to happen effectively. In terms of the types of ESG reporting to clients, the research finds that most asset managers offer proxy voting records, engagement records, and carbon footprint reporting for both ESG-labeled and non-ESG-labeled strategies.

Other Findings:

• In the U.S., soaring inflation and the prospect of a series of rate hikes by the Federal Reserve are casting a shadow over the economy. However, corporate defined benefit plans are constructed in a manner that may in fact benefit from the current environment because the present value of liabilities moves inversely to inflation rates. But plan sponsors will still need to be keenly aware of how impending interest rate increases could impact what are typically fixed-income-heavy portfolios.

• Despite being in a downturn, China’s property sector is not experiencing a systemic crisis—and Evergrande is still on the road to an orderly restructuring. However, investor confidence in the Chinese property market and high-yield bonds remains low. Inevitably, this has impacted demand for Asian high-yield bonds, which are dominated by issuers from China’s property market.