Pension plans across Europe believe environmental, social and governance (ESG) will become an increasingly important part of their investment strategies according to a recent survey by Create Research.

The research included a survey of 161 pension plans with total assets of €1.71 trillion and more in-depth interviews with 30 senior executives. The author, Professor Amin Rajan, wanted to examine how the pension funds were dealing with four potential shifts, he believes could occur in the global economy: from globalism to populism; from monetary to fiscal policy; from deflation to inflation and from over-regulation to deregulation.

Rajan questioned the pension funds on how likely they believed these potential shifts were; how they could affect asset allocation approaches; the future of long-term investing in this era of change; whether ESG could deliver robust portfolios to cope with the associated volatility? how asset managers could help their clients navigate the promise and perils of the emerging regime.

The responses found that 44% of the pension plans expected the role of long-term investing to rise, 48% expected it to remain unchanged and 8% expect it to fall. The survey also found that 61% of respondents expect to raise their allocations to the ESG theme, from the current average level of 36%.

Rajin suggested that pension funds were likely to extend their holding periods to allow more time for risk premia to materialise. He wrote that ‘Time in’ the market will matter more than ‘timing’ the market. The emphasis, by pension fund investors, he suggested is on remaining invested in quality assets, so as to gain more by losing less and outperforming over a full cycle.

At the same time, a hard-nosed approach to ESG investing was evident. It aimed to manage reputational risk, earn competitive returns, manage newly emerging climate change risks that are hard to model and deliver tangible societal impacts. Rajin suggested that ESG investing is now part of a new narrative: that sustainable long-term returns require a sustainable economy and society. What matters was not just a return for today or tomorrow but also for the next 25 years, when liabilities fully mature.

The report suggested that the rise of populism had all too clearly exposed the harmful side effects of globalisation: social instability, loss of skilled jobs and environmental damage. ESG investing, Rajin said, would continue to have a moral as well as an economic purpose as went hand in hand when delivering pensions over distant horizons.