ESG Among Key Headwinds Facing Pension Funds and Asset Managers


The politicisation of ESG, inflation, market volatility and slowing GDP growth are among the key challenges facing pension funds as they seek to balance short-term economic pressures and structural long-term changes, a new report says.

Assets under management (AUM) at the world’s top 300 pension funds increased by 8.9% to reach a record US$23.6 trillion in 2021, according to annual research published by the Thinking Ahead Institute. The growth rate is slower than 2020’s 11.5%, but takes five-year cumulative growth to 50.2% in the period between 2016-2021.

“Pension funds are under immense governance pressure from all sides, with a growing politicisation of ESG in some regions meeting calls for more substantial and urgent climate action,” said Marisa Hall, Co-head of the institute. North America now accounts for 45.6% of assets of the world’s 300 largest pension funds, up from 41.7% at the end of 2020. European pension funds account for 25.9% and Asia-Pacific 25.5%, with the remaining 4% from Latin America and Africa.

In the UK, The Investment Fund ESG Rating Review 2022 by XPS Pensions Group, which surveyed 63 asset managers to understand their current approach towards incorporating ESG and climate change risk, found that despite the encouraging development, only two in ten groups could demonstrate a credible plan within specific funds to meet their firm-level commitment. The survey revealed a significant rise in the number of fund management groups pledging to become net zero by 2050, with 81% now having such a commitment in place versus only 41% the previous year. However, currently only 22% of asset managers have 'credible' net zero plan despite 81% pledging targets. Meanwhile, 31% of managers could not provide examples of how ESG has been integrated into their funds, raising concerns over whether ESG practices are actually being applied.

Alternative asset classes continue to lag behind, particularly in terms of stewardship and engagement while coverage of climate data is limited. This also raises questions over whether sufficient focus is being given to ESG and climate change in these funds. Given the steady growth in Pension funds’ allocations to Alternatives, led by the US Pension funds, sourcing and providing ESG analysis and reporting remains a key challenge.

In Europe although deadlines are impending for the European ESG Template (EET), asset managers are not yet fully prepared to meet the more arduous and complex data obligations of the different European regulations. The latest study by FE fundinfo shows that around half of asset managers are “still grappling” with the issues and have yet to submit environmental, social and governance data on their funds. For this reason, and following pressure from asset managers, the deadline for ESG changes to MiFID II has been pushed back to January 1, 2023 (from August 2022).

The EET is not a regulatory initiative but is comparable to the European MiFID Template (EMT) and the European PRIIPs Template (EPT) in its ambition to produce a standardised framework. The main difference is in the vast number of mandatory, conditional and optional fields to be populated. Like its other template equivalents, the EET was developed by industry consortium Financial Data Exchange Templates (FinDatEx) to facilitate the exchange of data between product manufacturers and distributors across the financial services sector to provide a regulatory overview. In this case, it covers the Regulatory Technical Standards (RTS) under the Sustainable Finance Disclosure Regulation (SFDR) level and the relevant provisions of the EU Taxonomy Regulation and delegated acts of the revised MIFID II and Insurance Distribution Directive (IDD). Its target audience is insurers, distributors, fund of funds and other financial market participants, financial advisers, fund managers and end investors. There are two key regulatory deadlines for the submission of the EET. The first is the sustainable preferences of clients for MiFID II and IDD, which was to come into force initially on August 2, 2022, but was pushed back to January 2023. The ESMA published a note asking for this to be delayed to January 2024 to account for the difficulty of gathering all the required data.

In general, the EET will enable investors using underlying funds/financial products, such as funds of funds, and distributors to fulfil any SFDR reporting requirements and principal adverse impact (PAI) statement at both the product and company level. The PAI regime requires financial market professionals to provide extensive disclosures on various ESG-related matters, including environmental and social indicators. This translates into investment products, including Ucits, alternative investment funds, pensions, insurance-based investment products and managed portfolios, having to detail how they consider the mandatory and optional PAIs if labelled as Article 8 or 9.

One of the issues is that ESG is a relatively new investment trend, and product providers have not had to provide these types of granular data sets in the past. It has been well documented that the ESG information landscape is fragmented with disparate data sources and a proliferation of data providers and rating agencies all of whom have differing methodologies and processes.

More forward-thinking investors are increasingly building out their own ESG and Sustainability research, data analysis and risk control functions. Third party provider’s ratings and data may remain an important input into their processes but driving their own analysis is now very much their key objective.

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