In Europe, ESG is gaining traction in pension funds while it still lags a bit in US; raters also need to standardize.
While many observers thought environmental, social and governance (ESG) issues would take a back seat amid the pandemic, the opposite has happened, with treasury practitioners—at least in NeuGroup’s universe— seeking more information.
- Still, as members of the NeuGroup for Pensions and Benefits (NGPG) were told in a virtual meeting in May, it depends on where you are.
How important? “ESG means different things to different people,” a sponsor presenter told members. “In Europe it’s the first thing pensions want to talk about, but not in the US.” The presenter added that this interest has been driven by both stakeholders and government. “So, depends on where plans are located.”
- One member said ESG is considered in managing the company’s pension but it is just one of several other considerations. ESG “is adopted as one of the factors in evaluating portfolio choice,” he said. “But it’s not a controlling factor.” The member added that he “thought it would have more of an impact but as of now we have had less interest.”
- Since interest in Europe has been keener – particularly in Sweden, one member noted – multinationals were much more focused on ESG within their European funds.
Held to a different standard. There is also a difference in standards, with one ESG rater often seeing things differently vs. another ESG rater. Essentially there are no industry standards, members were told.
- The lack of measurement standards results in vastly different scoring depending upon which of the many vendors are used. But there are efforts afoot to unify standards.
- There’s also mixed evidence of the value-add of ESG-oriented investments: a Hamburg review of studies found a “non-negative” correlation between ESG and corporate financial performance, meaning there were mostly studies showing a positive relationship; but there were also a number of negative results. In the meantime, several sovereign wealth funds have targeted ESG believing ESG assets will outperform.
- This lack of rock-solid evidence in addition to fiduciary responsibility of pension managers has been cited as reason for the lack of interest in the US. Some participants said that they haven’t changed asset allocation in the US to reflect ESG.
- There is an effort underway in the EU to create uniform pension regulations, although Brexit means that UK will not be part of this work. However, UK interest in ESG is strong.