The 2015 COP Paris climate conference was a “game changer” and more global pension funds are pricing climate risk into their portfolios, according to a new survey by Create Research. It found that among the funds, “impact investing – the practice of using environmental, social and governance (ESG) factors to deliver competitive financial returns as well as positive societal outcomes” was rising.
The consultancy found that 52% of funds had adopted ESG criteria. Such investments currently have an asset allocation of 36% and that is set to rise over the next three years.
Create said the shift had been partly driven by increased public scrutiny of the funds. But other drivers included the long-term shift to a low- carbon economy, rapid technological changes, rising popular concerns about climate change, the adoption of the United Nations’ Principles for Responsible Investment and growing investor focus on new long-term risks that cannot be statistically modelled. It said ESG exposures are “seen as critical in conveying information about future risks that remain unfamiliar to conventional risk models.”
There was also a change in attitudes among investors. The report said 85% of millennials are interested in, or are actively doing, ESG. “In ten years, they will be the largest employee group in the pension landscape. What matters to them is not a return for today or tomorrow, but a return over their lifetime,” Create said.
In 2016, $22.9 trillion was invested in ESG globally – just over a quarter of total global assets. This number is expected to increase by 10% over the rest of the decade.