Pension funds turning to passives for climate/impact goals
The move is driven by development of rules-based indices, DWS survey finds.
Nearly a quarter (22%) of the world’s largest pension funds have implemented, or are in the process of implementing, impact investing via passive investments, according to new research.
The study, by asset manager DWS and CREATE-Research, Impact Investing 2.0 - Advancing into public markets’, found that even more – at 28% - expect to integrate impact investing-focused climate indices into their portfolios in the next three years.
The survey of 50 of the largest pension funds in the US, Europe, Asia and Australia, which have combined assets under management of €3.3trn, revealed that 22% are using, or plan to use, impact investing as part of their passive investments.
When asked what is driving their interest in impact investing in public markets, 66% of pension plans cited “enhanced” engagement activities, while 62% flagged the growth in companies transitioning from being climate “laggards” to climate “leaders”.
“Enhanced standards for assessing intentionality, additionality and measurability” were cited as a reason by 58% of plans, while the “proliferation of passive funds focused on impact themes” was identified by 48%.
DWS defined impact investing as “forms of investment that have a social and/or environmental goal in addition to a financial return”.
Meanwhile, 64% of pension fund respondents said the global net-zero target of 2050 is set to favour impact investing.
Pension funds’ growing interest in impact investing comes as net-zero targets and the UN’s Sustainable Development Goals (SDGs) are being replicated by rules-based indices, including EU Paris-aligned and EU climate transition benchmarks, SDG index products and green bond indices.
Thematic approach on the rise
Thematic passive exposures using exchange-traded funds (ETFs) and mandates are also increasingly available to institutional investors.
More than half of the survey’s respondents (58%) believe that growing interest in thematic funds will lead to greater impact investing over time.
Amin Rajan, CEO of CREATE-Research, said: “Pension funds increasingly see it as their duty to contribute, on behalf of their pensioners, to mitigate the negative effects of past economic development on the environment, climate, and biodiversity.
“There is still a long way to go, but the important first step has been taken.”
Pension funds increasingly see it as their duty to contribute, on behalf of their pensioners, to mitigate the negative effects of past economic development on the environment, climate, and biodiversity.
Passive momentum
Simon Klein, global head of passive sales at DWS, added that he had already seen high demand from private and institutional investors for “index concepts that formulate concrete goals”.
According to Schroders, passives now account for over a quarter of global investments in sustainable funds.
In a note on 30 August, Schroders’ co-head of investment and head of equities Rory Bateman wrote that the momentum behind the preference for passives has “clearly demonstrated the demand for low-cost, easy access to global markets”.
However, he also cautioned that its own research showed the ratings on which many passive ESG strategies are based “vary considerably”, which could mean that investors in passive sustainable funds “risk a mismatch between what they expect and the reality of what they receive”.
