Pension funds’ long term horizons mean they are ideally placed to benefit from ESG investing, and a number of large European funds already find value in the use of ESG factors. However, studies suggest that many funds have so far been slower to adopt ESG investing than other institutional investors.

This apparent reluctance may reflect some misunderstandings about ESG. Many pension fund trustees seem to believe that ESG investing limits diversification, leads to underperformance or conflicts with their objectives. That might explain why many pension funds are yet to fully realize the potential benefits of ESG.

A new EY report, Investing in a sustainable tomorrow, considers the arguments for European pension funds to adopt ESG investing. These include a number of industry developments and regulatory requirements. Arguably, it is the potential long term investment benefits that carry the greatest weight — both in terms of risk reduction and, potentially, of outperformance. However, the report also examines the practical barriers that make it difficult for many pension funds to explore the growing business case for ESG investing.

EY - Practical steps for investing in a sustainable tomorrow

A combination of external/regulatory requirements, industry developments and fiduciary evolution are pushing ESG investing up the European pensions funds’ agendas. Furthermore, a small but growing body of academic evidence indicates a link between corporate sustainability — a company integrating ESG goals into its strategy — and company financial performance. With this in mind, we offer some practical steps for exploring the potential benefits of ESG investing.

How to explore the potential benefits of ESG investing

Governance and control

Leadership and strategy

Understanding and capabilities

DB vs. DC

External partnerships and support

Investment management

Co-operation and collaboration

There are of course barriers and obstacles to ESG investing – these are explored in depth in the main paper. In light of these, pension funds should be aware not only of the potential opportunities, but also of the risks of inaction in this arena. Despite the complexities of the topic, there is much that European funds can do to engage with ESG investing and to benefit as a result.

Download the full paper, Investing in a sustainable tomorrow.

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