Sustainable investing is not yet the trend in Switzerland

Institutional investors in Europe and the UK are increasingly focusing on environmental and social (ESG) issues. Meanwhile, 76 percent are looking at ESG issues and associated risks. While the environment remains the focus of institutional investors, some investors are beginning to broaden their focus to include social factors (27 percent) such as human capital and labor rights. These are some of the findings of Mercer's European Asset Allocation Insights 2021, which shed light on various investment allocation issues facing European pension institutions. The survey examined investment strategies in the U.K. and European pension industry with some 850 institutional investors in eleven countries, representing total assets of about one trillion euros. About half of the institutions surveyed manage less than $100 million.

Sustainable investing is not yet a trend in Switzerland

In a European comparison, Switzerland is a clear exception: According to the study, only 14 percent of pension funds have already taken ESG risks into account. Moreover, they focus almost exclusively on environmental factors. It should be noted that the majority of participants in the Mercer study were smaller funds (75 percent have less than USD 500 million in assets), which are often slower to act on strategic issues.

"The study makes it clear that there is still room for improvement in terms of sustainable investments, especially at smaller institutions. It is not only from a moral, social and political perspective that ESG should become an issue: It also shows that sustainable and impact investments can also be good for portfolio risk hedging and ultimately returns," comments Tobias Wolf, Head Advisory at Mercer Switzerland. "However, smaller funds often have insufficient resources for such strategic issues. It is then important to obtain external support, e.g. for setting up a holistic ESG strategy and accompanying its implementation up to the selection of suitable investments."

The number of European investors using low-carbon or climate-related indexing has risen sharply compared to last year (26 percent versus 6 percent). The survey shows that a large majority of investors integrate ESG into all aspects of their operations, including investment manager selection (83 percent), investment manager monitoring (88 percent), reporting (79 percent) and asset allocation (64 percent). The survey also shows that investors are moving from a more reactive to a proactive stance, with regulatory factors as a motivator for the
Consideration of ESG risks to become less important (67 percent cited this as the main reason, up from 85 percent the previous year). "During the pandemic period, which was a major challenge for many investors, there was a sharp increase in investment in sustainable investment funds across Europe," said Joanne Holden, Global Head of Investment Research at Mercer. "While environmental issues remain front and center, it is encouraging to see that many investors are beginning to consider the social impact of their investments. Investors are becoming aware of how the elements within the ESG complex are interrelated, and how people and the planet are connected. And with corporate responsibility at the top of boards' agendas, more companies are looking to do their part to support issues like human rights, fair pay and social justice."

Allocations to alternative investments increase

More generally, the Mercer study shows that the allocation to alternative investments is now almost equal to that to equities, and in some cases (UK and Germany) even higher. The shift away from equities continues among UK and European investors (from 22 to 21 percent average allocation in the
overall portfolios) as they seek to diversify their return drivers, protect against market volatility, and tap inflation-protected return streams. Many defined benefit investors are increasingly seeking diversification across alternative asset classes (from 18 to 20 percent), such as fixed income
growth investments, private equity and real assets. In Switzerland, the picture is different: the typical allocation to alternatives is only 7 percent, while bonds, equities and real estate continue to dominate portfolios with 33, 31 and 23 percent, respectively. "We continue to see enormous potential for Swiss investors to take advantage of the many benefits of a higher allocation to Alternatives: Better diversification, optimized risks and higher long-term return opportunities, especially when taking advantage of illiquidity premiums in private markets," said Matthieu Mougeot, Investment Solutions Leader at Mercer Switzerland. "Working with an expert and delegating resource-intensive parts of the investment process can make all the difference for investors here. Not only in identifying the right strategies from a global pool, but also in accessing attractive opportunities and executing the strategy at a high level."

Looking ahead, the majority of investors (53 percent) plan to learn lessons from the pandemic by revising their investment strategy, manager mandates or plan governance. However, a sizable minority (38 percent) do not intend to make changes to their plan's governance as a direct result of last year's events. Sustainable investing thus remains a hesitant practice in Switzerland.

Source: Mercer