Pension funds, the opportunities offered by sustainability

THE European pension funds have good reasons to be optimistic in 2024, having emerged from two years of crisis with great financial solidity and facing many opportunities to reinvest in the long term with attractive returns.
One of the opportunities presented to pension funds is linked to sustainable investments. There are numerous funds that invest in sustainability and this is because, given their long-term objectives, they are the subjects most suitable to fill the investment gap needed to achieve the United Nations Sustainable Development Goals (SDGs), which still amounts to $4 trillion, especially in energy, water and transportation infrastructure.

Research by Goldman Sachs Asset Management on pension funds, which involved 126 fund managers and top managers across Europe, who manage assets with a size ranging from less than 500 million dollars to more than 50 billion.

How much ESG factors weigh in strategies

The survey also shows that noting that 87% of European pension funds believes that sustainability is a critical factor in investment choices. Furthermore, pension funds pursue this commitment with conviction: 63% of those interviewed allocate more than 10% of their portfolio to sustainable investments and 45% allocate more than 20% of the portfolio to the ESG asset category.

Where to invest

The funds invest mostly in shares of developed markets (72%) and investment grade bonds (65%) to pursue their sustainable investment strategy and orient their portfolios based on environmental and governance criteria. The sectors where we invest the most are infrastructure (42%) and real estate (38%).

However, as regards the sustainability factors that pension funds take into consideration in portfolio allocation, in the lead are exclusions in relation to product involvement (57%), exclusions in relation to corporate conduct (50%) , Scope 1 and 2 emissions objectives (47%), exclusions in relation to the geographical origin of the investor (34%). 26% also look at specific SDGs and 16% at Scope 3 emissions objectives.

Which goals are most urgent?

The risks associated with climate transition (with 75% of the preferences) are at the top of the list of core issues for pension funds that invest in sustainability, followed by a strong governance (61%), come on human rights (49%) and come on physical climate risks (49%). And this, according to Goldman Sachs Asset Management, demonstrates the extent of pension funds' commitment to sustainable investments across the ESG spectrum.

The reasons that drive investing in ESG factors

The opinions expressed in the survey underline that investors' attention towards sustainable investments is both financial issueboth of risk mitigation and of generation of returns. Nearly a third of respondents (30%) say the primary reason for implementing a sustainable investment approach is a manager's fiduciary responsibility, while a fifth (21%) cited risk mitigation as the reason.

Analyzing this topic further, it was discovered that the majority of those interviewed (84%) believes that integrating ESG criteria into investment decisions can help reduce long-term risksand more than half (55%) say this approach can generate alpha.