Pension schemes upping commitments to net-zero

Global institutional investors have “significantly” raised their net-zero ambitions over the past year, with 67 per cent of all pension schemes now having some form of net-zero commitment in place, compared to 47 per cent last year, industry research has found.

The Aviva Investors Real Assets Study revealed that 52 per cent of insurers and 50 per cent of pension schemes have committed to achieving net zero in their portfolios before 2050, representing an overall increase of 12 percentage points over the past year.

European investors in particular were leading the way, with 53 per cent having pledged to achieve net-zero by 2050.

North American pension funds were also “significantly” ahead of their European and Asian counterparts, with 60 per cent having set a target to reach net zero by 2050, compared to 47 and 41 per cent of schemes in Europe and Asia, respectively.

There was also evidence of an uptick in the desire for greater transparency and integration of environmental, social and governance (ESG) considerations, as 55 per cent of pension schemes viewed asset managers’ ability to integrate ESG factors into the investment process as "critical".

The survey also looked at which climate focused KPIs were most important to investors, with physical climate risk cited by 37 per cent of pension schemes, and carbon footprint highlighted by 36 per cent of pension schemes.

Challenges persist, however, as around 85 per cent of pension schemes rated the environmental pressures of investing into new infrastructure as either very or slightly discouraging.

Aviva Investors Real Assets chief investment officer, Daniel McHugh, highlighted the findings as demonstration of the pace at which real assets is evolving as an asset class on climate and ESG issues, and how critical those considerations are seen to investment decision-making.

He commented: “This includes a fundamental shift towards measuring and quantifying those factors, rather than paying lip service to them through pledges and policy alignment.

"Partly that is as a result of better understanding of the elements involved but also as end-savers scrutinise more for potential greenwashing practices.

"Encouragingly, real assets are often favoured by investors for integrating these themes into portfolios, as their positive impact is typically clearer to isolate and quantify."

Indeed, more broadly, the survey found that appetite for real assets has continued to remain "high" amongst institutional investors, with 77 per cent of pension schemes globally stating their intent to increase or maintain their allocation over the next 12 months.

In particular, real estate long income and real estate debt were found to be the real asset that pension schemes were most likely to increase investment in, with 49 per cent of pension schemes suggesting that they would invest further in these areas in future.

Illiquidity also remained the top concern for pension schemes, however, cited by 37 per cent of pension schemes, although McHugh suggested that the attraction of real assets has been further supported by their resilience over the past 18 months.

“Despite the exceptional challenges facing all markets, real assets have delivered robust income streams, underpinned by consistent returns and lower volatility relative to other asset classes, bringing further recognition of the all-round qualities these strategies can provide to a portfolio beyond being simply a diversification play," he said.

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