European Asset Owners Slow to Set Targets for Addressing Climate Risks

Seven in ten have no carbon-footprint reduction targets in place for externally managed portfolios.

Despite their rising focus on climate change, relatively European asset owners are setting clear targets to limit climate-related risks or report performance, according to a new survey of insurers and pension funds.

Consulting firm Cerulli Associates’ latest report – European ESG Investing 2020: Leading the Global Revolution – highlighted that while 55% of UK asset owners surveyed referred to fossil fuel divestment in their climate policies, only 38% actually set targets for divestment.

“Although climate change is the key topic addressed in many European asset owners’ responsible investment policies, not many set targets to reduce climate-related risks or report their performance against these targets,” said Justina Deveikyte, Associate Director in Cerulli’s European institutional research team and lead author of the report.

Data from the survey showed that nearly 70% of European asset owner respondents do not set carbon-footprint reduction targets for externally managed portfolios. This percentage is lower in the Nordics, where around half of the asset owners surveyed do not set targets.

Nearly 77% of insurance companies address climate change explicitly in their responsible investment policies, as do 53% of the pension funds surveyed in the report; French, Dutch and UK asset owners more likely to do so, compared to Italian or Swiss counterparts.

Another key takeaway from Cerulli’s survey is that only the most sophisticated asset owners incorporate climate risks into their strategic asset allocation modelling. The failure to take climate risks into account stems from the fact that current models tend to consider historical data rather than forward-looking inputs, the report said.

Among the pension funds surveyed, only 34% addressed physical and transitional risks explicitly in their climate policies. A much higher proportion of insurance companies address these risks, with 63% addressing physical risks and 58% addressing transitional risks explicitly.

“Pensions typically refer to climate change risk in general, without specifying the actions they are taking to mitigate physical and transitional risk,” the report stated.

Efforts to set targets have increased, especially among larger institutions. In October, the Net-zero Asset Owner Alliance, led by 30 of the world’s largest investors with combined assets of US$5 trillion, unveiled its 2025 emissions reduction protocol.

Switching from passive to active?

The Cerulli report also stated that 68% of insurer respondents and 63% of pension fund respondents plan to switch from passive to more active investment approaches to improve ESG integration over the next three to five years.

The survey found divergence, however, in the importance of criteria used by asset owners to assess asset managers’ ESG performance. While 45% of insurers said linking asset manager compensation to ESG performance was ‘very important’, only 30% of pension funds agreed.

Across all interviewees, the three most important factors in assessing ESG performance were: integration of ESG personnel into investment teams (69%); quality of ESG integration process (68%); involvement in sustainability industry organisations (67%); and data sets used in decision making (66%).

Cerulli surveyed 160 institutional investors – 62 insurers and 98 pension funds – with more than €5 trillion in assets under management.

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