Mercer’s 2018 European Asset Allocation Report reveals that more European pension funds are considering the investment risks posed by climate change. Seventeen percent of the 912 participants in Mercer’s 2018 survey stated that they now consider the investment risks posed by climate change, up from 5% in Mercer’s 2017 survey and 4% in 2016. This more than three-fold increase comes as NASA has confirmed that April 2018 was the third warmest April since modern record keeping began in 1880.
The 2018 survey – the 16th edition - gathered information from institutional investors across 12 countries, reflecting total assets of around €1.1 trillion. In addition to investment strategy information, the report also explores the drivers behind Environmental, Social and Corporate Governance (ESG) integration and a few key areas within responsible investment: investor stewardship, active ownership rights and finally, the investment risks and opportunities posed by climate change.
According to Paul Kenny, Head of Investments for Mercer in Ireland, “Nudges by the Pensions Authority, the EU Commission and the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) are driving increased engagement. However, at 17% of respondents, there is further to go in terms of serious investor engagement on this issue. We expect the industry-led approach of the TCFD to continue to drive awareness of the issue.”
Rob Meaney, Head of Responsible Investing for Mercer in Ireland said: “A proactive approach to consideration of environmental issues can open up investment opportunities in the green fields of the low carbon economy, while inactivity by pension schemes brings risks from stranded assets and physical climate risks, as well as reputational risk. Given increasing regulatory involvement and public concern about climate change, it may be that in time a lack of consideration of ESG risks will be seen as a breach of fiduciary duty. We continue to work with our clients to help them integrate consideration of ESG within their decision-making processes.”
The Mercer European Asset Allocation Survey also examines the broader asset allocation trends of pension schemes. According to the 2018 report, average equity allocations for Irish defined benefit schemes now stand at 34%, compared to 39% in 2017. Bond allocations increased to 51%, from 48% last year. while allocations to alternative assets (such as property and private equity) have increased by from 11% to 15% since the 2017 report.
Commenting on these broader asset allocation trends, Mr. Kenny noted: “It’s interesting to see that equity allocations continue to reduce, despite generally positive market returns and supportive macroeconomic factors”.
Mr. Kenny added: “Equity markets remain an important asset for Irish pension schemes, but pension scheme trustees are increasingly looking to reduce equity risk levels to ensure portfolio risks are balanced and pension schemes are sustainable for the long-term. Bond allocations have increased slightly over the last 12 months, but we have actually seen a larger increase in alternative assets, with areas such as private debt and infrastructure gaining interest from pension schemes. We expect this trend to continue”.
Notes to Editors
Note: Please note that options are not exclusive, with some asset owners motivated by a combination of reasons.
Note: The TCFD was formed in following the Paris agreement which came in to force in November 2016 and set an ambitious target to keep warming below 2° C. Their mission is to develop recommendations for voluntary climate-related financial disclosures that are consistent, comparable, reliable, clear, and efficient, and provide decision-useful information to lenders, insurers, and investors.
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