The vast majority (81 per cent) of global pension plan sponsors said they have allocations to some kind of climate change-related funds, according to a new survey from CREATE-Research.
Specifically, when it comes to passive funds, 44 per cent of respondents said they allocated at least some of the passive segment of their portfolio to a climate change-related fund. A quarter (26 per cent) said they allocated 15 per cent or more to passive climate change funds, while 56 per cent said they didn’t have any of these passive allocations.
The survey also found a clear preference for active allocations when it comes to climate change-related investing. “The key reason behind the difference is that climate change remains an inexact science for investors. Hence, initially, they have preferred to invest with specialist active managers who have long developed an infrastructure of skills, technology and data to build up a good track record in theme investing. Besides, some of the underlying asset classes — like private equity and infrastructure — are in illiquid markets where indices remain a rarity.”
Another potential reason is the relatively new concept of using passive vehicles to capture specific themes, noted the survey. Almost two-thirds (64 per cent) of pension plans said they have a mature relationship with passive funds in general, while 17 per cent said they’re in the implementation phase, with eight per cent close to decision-making and 11 per cent are only in the awareness raising phase.
When looking specifically at the theme of climate change, more pension plan sponsors said they consider it a critical issue. More than half (54 per cent) said they believe climate change is becoming increasingly material to securities pricing and value creation. However, when asked about passive climate change-related funds, only 21 per cent said they’re in the mature phase, while 43 per cent said they’re only awareness raising.
“The perception that passive funds merely follow a simple low-cost, rules-based style that mimics its chosen broad indices remains ingrained in the investor psyche, especially in the U.S.” the survey said. “This holds that these funds do not exercise their voice often enough to influence their investee companies’ carbon footprint and lift the quality of their beta assets due to over-reliance on proxy-voting advisors.”