Pension funds are increasingly integrating ESG into the investment process

As a result of greater sustainability awareness, Swiss pension funds are no longer focusing solely on achieving the necessary returns. Of course, in accordance with the legal mandate of the second pillar, said returns should cover the obligations of the institution in the long term. At the same time, there are greater demands from insured parties and the public that they also be "social."

This means that, in addition to traditional criteria, ESG issues should also be considered when making investment decisions. The fiduciary duty of due diligence is also being increasingly interpreted to mean that sustainability considerations, provided they are financial and material, are part of the economic opportunities/risks and should be included accordingly. 

The path to a sound, individual sustainability policy for the individual pension fund starts with a dialog within the board of trustees. The board develops the fund-specific understanding of sustainability as the central basis, which is then used to gradually integrate the sustainability policy into all levels of the strategic investment process: from design and implementation to performance monitoring.

The current pension fund survey shows a growing share of assets invested according to ESG criteria. The proportion of pension funds that invest over 60% of their assets with a focus on sustainability has risen from 10.8% three years ago to 28% currently. Almost half of respondents expect to invest more than 60% of assets sustainably by 2024. To do so, pension funds use different approaches; most of them use several at the same time.

Three-quarters of survey respondents exclude companies or sectors from the investment universe if they violate certain criteria or standards. In this context, the list published by the Swiss Association for Responsible Investments (SVVK) forms a basis that has increasingly established itself as the industry standard. Sixty percent of pension funds generally follow the SVVK recommendations. At 70% and 51.4%, respectively, ESG integration and ESG engagement are the most common approaches to sustainable investing.

Companies that have a negative impact due to their activity (e.g. arms or pornography), their large CO₂ footprint, or their behavior with regard to labor and human rights or corruption are excluded.

The listed, sustainable investment approaches are mainly used in Switzerland, Europe, and North America. However, the development of additional sources of returns and the reduction of the investment risks also motivate pension funds to invest sustainably in emerging markets, particularly in China.

Equities have the highest share of sustainably invested assets across all regions. Ninety percent of study participants indicated that at least one-fourth of their equity allocation in developed countries is implemented in a sustainable manner. Fifty percent said that one-fourth of their investments in equities in emerging markets are carried out in an ESG-compliant manner, while 10% also implement corporate and government bonds in a sustainable manner in China.

The key reasons for sustainable investing mainly include conviction, but also reputational risks as well as current and future regulatory developments.

In contrast, four out of five pension funds regard the lack of transparency in ESG data as a hurdle. And approximately half of them see a challenge in the distinction between greenwashing and investments with a lasting positive impact with regard to ESG criteria. The unknown impact of sustainability on performance, the associated costs, and the lack of resources are also listed as obstacles.

Looking at the obstacles listed in the survey, it is not surprising that many pension funds rely on external support for their sustainability efforts. In this context, the services of banks and asset managers are mainly used, followed by consultants and sustainability agencies.