Investment Trends

European Pensions Funds Want More Sophisticated Customization For ESG Mandates

A lack of suitable products is prompting large schemes to create customized ESG mandates

Providing analysis of recent events and trends shaping over 40 asset marketplaces worldwide, a new publication from Cerulli Associates provides a single source of coverage of the global retail and institutional asset management marketplaces. 

March 3, 2023, LONDON—Ongoing regulatory change in Europe is spurring more advanced environmental, social, and governance (ESG) strategies in the pension space, but a lack of suitable products is seeing larger schemes create customized mandates, according the latest Cerulli Edge—Global Edition.

“With institutional investors seeking more sophisticated strategies, customized solutions represent an opportunity to tailor portfolios to savers’ ESG criteria,” says Justina Deveikyte, director of European institutional asset management research.

Across Europe, the ESG space is maturing, with growing complexity, heightened scrutiny, and a pressing need for new products. Clear ESG integration and a decent level of stewardship are now the baseline for strategies and institutional investors are seeking to differentiate their approaches to sustainability by considering impact and risk management as separate areas of focus.

An increasing number of pension schemes are turning to customized solutions to meet burgeoning ESG demand and to reduce the risk of greenwashing products being included in portfolios. The tailored and customized solutions offered range from modified off-the-shelf products to new portfolios built from the ground up.

One fiduciary manager told Cerulli that, at one time, clients would look to customize their solutions to add ESG factors, but that fiduciary managers are beginning to offer responsible investment themes as standard.

“Clients can now choose the standard solution that incorporates thematic ESG or advanced customization, which goes a step further and includes impact investing,” says Deveikyte. “The move to a standardized solution incorporating ESG criteria was achieved by looking at existing asset classes to see how they can be thematically changed, but without an increase in cost or a reduction in returns.”

With institutional investors seeking more sophisticated strategies, customized solutions represent an opportunity to tailor portfolios to savers’ ESG criteria...

The most promising customization trend stems from new data and risk modeling practices that quantify the financial risks of the transition at the portfolio level.

The cost of a customized approach makes it inaccessible to most schemes, but asset managers and consultancies have spotted an opportunity to create intermediary products that can serve investors with similar ESG alignments.

Other Findings:

In parts of Asia, insurers are becoming more akin to investment companies, with increasingly higher percentages of earnings coming from their investment operations. Regulators are conducting assessments of the systemic risk of insurance companies failing or going bankrupt. In the short term, Cerulli expects insurers to take advantage of attractive equity valuations to top up their equity positions. However, in the medium term, there could be a reduction in risk assets as insurers adjust their risk budgets according to International Financial Reporting Standards 17 and risk-based capital requirements causing insurers to tilt their portfolios to fixed income.

In the US, higher allocations into alternative investments by high-net-worth (HNW) investors looks set to have a trickle-down effect. The adoption of alternatives by individual accredited investors and qualified intermediaries is starting to define a new era for the private market space. As target demographics broaden to the level of all HNW clients, distribution strategies are changing from institutional buying processes at the ultra-HNW level all the way down to a more widely distributed and opaque world of investment decision-making that differs from channel to channel and firm to firm.




About Cerulli Associates
For over 30 years, Cerulli has provided global asset and wealth management firms with unmatched, actionable insights.
Headquartered in Boston with fully staffed offices in London and Singapore, Cerulli Associates is a global research and consulting firm that provides financial institutions with guidance in strategic positioning and new business development. Our analysts blend industry knowledge, original research, and data analysis to bring perspective to current market conditions and forecasts for future developments.