Dutch are Leading European Pension Funds’ Path to Net Zero

While climate-related strategies are in demand, institutional investor and asset manager focus on biodiversity has “lagged”, says Cerulli.

European pension funds are increasingly prioritising climate-related issues by investing in low-carbon investment alternatives to fossil fuels and committing to net zero greenhouse gas (GHG) strategies, according to research consultancy firm Cerulli.

The analysis of pension funds across seven European countries highlighted that 40% have already made formal commitments to running net zero portfolios by 2050, with 20% planning to do so within the next two years, according to the report. Nearly 70% of respondents said they already invest in renewable energy and 59% in energy-efficient assets.

However, progress varies across countries, with 23% of Italian respondents and 30% of UK respondents having committed to net zero compared to half of Dutch respondents. More than half of Dutch pension funds are also actively investing in ways that support the transition to a carbon-neutral economy, the report added.

Information on temperature alignment with the Paris Agreement’s 2°C scenario is less of a priority to European pension funds, Cerulli said, although 40% of French pension funds use this data.

Another recent report by Cerulli highlighted that Asia-Pacific asset owners are also increasingly focused on managing climate risks, but noted that progress is limited by complexities and inconsistencies in assessing data and risks cross different asset classes.

Meeting expectations

The increased focus on climate-related investment risks is putting pressure on asset managers to provide climate-related products and manage associated portfolio risks on behalf of their pension fund clients.

For example, 85% of assessed Dutch pension funds require their asset managers to disclose the carbon footprints of their portfolios, the Cerulli report noted. The proportion of pension funds elsewhere in Europe asking their asset managers for this level of detail is lower – around 50% in both Italy and the UK.

“Pension funds expect their asset managers to be serious about ESG,” said Justina Deveikyte, Director of European Institutional Research at Cerulli. “To illustrate their commitment, a manager could join industry schemes such as the Net Zero Asset Managers initiative or commit to reporting against the Task Force on Climate-related Financial Disclosures guidelines,” she added.

As well as pressure from asset owner clients, new regulatory measures are ensuring that asset managers are implementing strategies to account for ESG-related risks in their products and portfolios.

By the end of Q1 2021, European asset managers were managing €11 trillion using ESG-focused strategies, according to an European Fund and Asset Management Association (EFAMA) report.

European asset managers are subject to the first stage of the EU’s Sustainable Finance Disclosure Regulation (SFDR), which has required them to better measure and disclose the ESG-related performance of their holdings.

Level 1, which went live in March, asks asset managers to sort their EU-domiciled funds into progressively greener categories: Articles 6, 8 and 9. Level 2, which will require asset managers to justify these categorisations, has been delayed until January 2023.

The management of Article 8 (environmental and/or social characteristics) and Article 9 (environmental and/or social objective) is “unevenly spread” across the EU, the EFAMA report noted. As of the end of Q1 2021, 75% of all Article 8 funds were managed in France (36%), Sweden (22%) and the Netherlands (17%). Article 9 funds were even more concentrated, with more than 80% managed in France (58%) and the Netherlands (24%).

However, over the course of 2021, EFAMA said Article 8 and 9 funds have more than likely become increasingly common across Europe.

Biodiversity themes limited 

While climate change risks have captured global attention, the topic of biodiversity has “lagged”, said Cerulli’s Deveikyte.
European asset managers, in particular, still have “a long way to go” before the integration of biodiversity-related risks is standard, a separate Cerulli report noted.

Around 65% of European asset managers neither address biodiversity risks within their wider responsible investment policy nor have a standalone policy. Of those that are looking to address biodiversity risks, not all of them have a “clear approach” and are lacking “specific commitments”, the report noted.

Cerulli has called on asset managers to consider developing a biodiversity policy within the next 12 months and to participate in industry organisations that focus on biodiversity in this space.

It is a similar story for institutional investors.

The majority are still in the early stages of assessing their portfolio exposure to biodiversity-related risks, with just 18% of Italy-based, 25% of UK-based and 35% of France-based institutional investors currently investing in biodiversity-related products and strategies, the report highlighted.

“Climate-related themes will remain in the industry’s focal point in terms of responsible investing for at least the next 12 months, but we expect that some pension funds will start putting more emphasis on themes such as affordable housing, biodiversity and sustainable forestry,” said Deveikyte.

Investor focus on mitigating biodiversity-related risks is expected to be accelerated by international initiatives and policies.

The UN Biodiversity Conference (COP15) – the first part of which took place in October – began the process of finalising the Global Biodiversity Framework (GBF). The GBF is an international agreement between policymakers to work on reducing threats to biodiversity and backing the development of mainstream tools and solutions.

Further, the voluntary framework being developed by the Task Force on Nature-related Financial Disclosures (TNFD) is expected in 2023. The framework will aggregate the “best tools, materials and initiatives that already exist, in order to promote worldwide consistency” in addressing nature-related risks such as biodiversity loss, said Elizabeth Maruma Mrema, Co-Chair of TNFD and Executive Secretary of the UN Convention on Biological Diversity (CBD).

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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