05 October 2021
Over two thirds (69%) of Irish pension funds are taking environment, social and governance (ESG) issues into account to inform investment decisions, according to Mercer’s latest European Asset Allocation insights report published this week. Mercer’s research covers 12 European markets where, in the past year, an extra €233 billion was allocated to sustainable funds.
Irish pension scheme’s focus on ESG was less than the European average, with 76% taking ESG issues into consideration, rising to over 80% in several markets including the UK (84%), Germany (88%) and Spain (92%). In prioritising the relative importance of ESG issues, Ireland was the only country where investors didn’t rank environmental as the most important ESG component, ranking it second behind governance issues.
The report also showed a continued reduction in the allocation to equities and alternative investments in Irish defined benefit pension schemes. This year 23% of assets were allocated to equities, compared to 27% in 2020. Bonds have been the beneficiaries with the allocation rising to 58% from 50% last year, as investors seek to protect against volatility and act on concerns related to high valuations in equity markets.
The reduced exposure to equities is part of a longer-term shift in asset allocation. Looking back five years to 2016, equities accounted for 36% of the typical Irish defined benefit portfolio, with 49% in bonds. Allocations to alternative investments have seen a material increase over this period, reflecting the diversification benefits offered.
In its review of market performance in 2020 the report found that despite the fall in equity markets in March 2020 due to Covid-19 fears, overall equity markets posted positive returns of 6.1% for developed markets and 8.1% in emerging markets. In the face of high equity market valuations, defined benefit plans are diversifying and derisking from growth assets into liability matching assets as and when opportunities arise.
Looking at defined contribution pension schemes, which don’t have a guaranteed payout level, the allocation to equities is much higher at 50%, with 13% in bonds and 29% in alternatives. Ireland has a slightly higher equity allocation than the European average of 47%.
Mercer’s European Asset Allocation Insights 2021 provides a comprehensive overview of investment strategy across the European pension industry, and identifies emerging trends in the behaviour of around 850 institutional investors across 12 countries, reflecting total assets of approximately €1 trillion.
Rob Meaney, Responsible Investment Lead for Mercer Ireland said:
“While the pandemic was a very challenging period for many investors, it also saw a large increase in assets moving into sustainable funds across Europe. The pandemic has caused a lot of investors to wake up to how the elements of ESG are connected. Although environmental issues continue to remain a key focus, social issues such as human rights and social equity are now much higher up on the agenda, in part due to the impacts of the pandemic.”
“Trends in Ireland are slightly lagging European norms with 69% of Irish pension schemes taking ESG issues into account in their asset allocation decisions, compared to the average of 76% across Europe. The research showed that a large majority of European investors integrate ESG into all aspects of their operations including: investment manager selection (83%), investment manager monitoring (88%), reporting (79%) and asset allocation (64%). Mercer’s survey also indicated that investors are moving from a more reactive position to a proactive one, with regulatory drivers decreasing in significance as a motivator for considering ESG risks (67% cited this as a key driver, down from 85% last year).”
“The vast majority of investors have firmly embedded ESG considerations in their investments. We continue to work with our clients in Ireland to focus on those key actions that will deliver the most impactful change over time while accompanying them on the rapidly evolving journey towards sustainable investing.”
Olivier Santamaria, Head of Investments for Mercer Ireland:
“The two biggest concerns for investors this year were COVID-19 remaining an obstacle for for full reopenings and a potential equity market correction. With equity valuations at record highs, Irish investors continued to seek diversification and derisk, with a higher allocation to bonds and cash. For Irish defined contribution schemes, investors are more heavily weighted towards equity as they look to the higher returns equities can offer over the longer term to build up their pension savings.”
Notes to Editors:
For this year’s European Asset Allocation Insights Mercer produced four reports, including one dedicated to sustainable investments. The full set of reports can be downloaded here.
Mercer believes in building brighter futures by redefining the world of work, reshaping retirement and investment outcomes, and unlocking real health and well-being. Mercer’s approximately 25,000 employees are based in 43 countries and the firm operates in 130 countries. Mercer is a business of Marsh McLennan (NYSE: MMC), the world’s leading professional services firm in the areas of risk, strategy and people, with 78,000 colleagues and annual revenue of over $18 billion. Through its market-leading businesses including Marsh, Guy Carpenter and Oliver Wyman, Marsh McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit www.mercer.ie. Follow Mercer on LinkedIn and Twitter.