A lack of sophistication in the European funds market is seeing larger pension schemes opting for customised ESG mandates, with impact and risk management increasingly being regarded as “separate areas of focus”. According to a new report by global research and consulting firm Cerulli, pension schemes are either modifying off-the-shelf products or building new portfolios from scratch, partly to reduce the risk of greenwashing, but also in response to regulatory drivers. Noting that integration of material ESG risks is increasingly regarded as essential to fiduciary duty, the report cites examples of large European pension schemes tilting portfolios toward infrastructure or emerging markets exposures to meet sustainable investing objectives. While larger schemes are relatively willing to pay extra for tailored solutions which are better aligned to their investment beliefs, the Cerulli report noted that cost-effective customisation is possible via new data and risk modelling practices that quantify the financial risks of the transition at the portfolio level. “Being able to quantify business issues that are going to be affected by the transition will help schemes reach a more detailed understanding of the financial risks involved, the transition values at risk, and the physical value of the risks,” it said.
Ongoing regulatory change in Europe is spurring more advanced #ESG strategies in the pension space, but a lack of suitable products is seeing larger schemes create customized mandates. Learn more in our latest Cerulli Edge―Global Edition: https://t.co/wlQwfhBsat #pensionfunds pic.twitter.com/QnoamISxVX
— Cerulli Associates (@cerulli_assoc) March 3, 2023