12 November 2019

IPE: Reputational risk drives ESG at pension funds more than at other investors

Avoiding reputational risk drives pension funds to adopt environmental, social and corporate governance (ESG) “principles” more so than it does other types of institutional investors, a survey suggests.

More than one-third (35%) of pension fund respondents to the survey – carried out by State Street Global Advisors (SSGA) earlier this year – included reputational risk as a top three factor driving ESG investing at their institution, compared with 21% of endowment and foundation respondents, and 6% of sovereign wealth funds.

“Reputational risk is of greater concern for pension funds, particularly public pension funds, because any public criticism of their portfolio allocation decisions often leads to additional scrutiny by their beneficiaries,” Rakhi Kumar, head of ESG investment strategy at SSGA, said. “This could result in increased regulation or interference in the investment decision making process.”

Meeting or anticipating regulation was the most significant driver of pension funds’ adoption of ESG principles, however, the survey showed, followed by mitigating ESG risks, and fiduciary duty.

Across all types of institutions, in Europe, regulatory shifts were the clear top “push factor” (52%), said SSGA, followed by a desire to mitigate ESG and reputational risks (45% and 39%, respectively).

This is arguably no surprise given developments such as the European Commission’s sustainable finance action plan in Europe, while the US, according to the Principles for Responsible Investment (PRI), is an exception to the growth in sustainable finance policy measures since 2000.

Across all regions, outperformance emerged as a less significant ESG adoption driver than risk mitigation.

Almost half of the surveyed investors (48%) felt their ESG/responsible investing strategy had a positive impact on the “ESG behaviour” of their investee companies or reduced ESG risks to their portfolio (47%).

For respondents who noted fiduciary duty as their primary consideration, the next and highest ranked drivers – both at 40% – were requirements for ethical and social responsibility on behalf of their clients and a desire to mitigate ESG-related risks.

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