Markets Test Top Pensions’ Commitment to ESG

State politics is a particular threat to efforts on sustainability by U.S. pensions, according to the Think Ahead Institute.

Sasirin Pamai/Big Stock

Sasirin Pamai/Big Stock

Even as the largest pension funds in the world grapple with macroeconomic challenges, they are still stepping up their commitments to environmental, social, and governance mandates.

But an annual study on the global top 300 pension funds, Willis Towers Watson’s Thinking Ahead Institute (in conjunction with Pensions and Investments) highlights that increased regulatory scrutiny on practices like greenwashing are pushing public pension funds to reassess their communication with their stakeholders when it comes to reporting on climate action. The increasing politicization of ESG is a particular threat to efforts on sustainability by U.S. pensions, according to the institute. And many lack resources to make good on their commitments. The Thinking Ahead Group research team analyzed performance and trends at the top 300 pension funds in the world, which together have $23.6 trillion in assets under management.

The study reported that pensions are finding ways around a lack of resources. “Pension funds are pursuing more strategic engagements, building more effective coalitions and implementing more sophisticated portfolio solutions,” the report said. “Whilst most of the industry is managing climate-related risk in portfolios, the shift to real-world impact is in its embryonic stages.”

The increased emphasis on ESG comes during a period when growth is slowing for pension funds. In 2021, assets at these funds increased by only 8.9 percent, compared to growth of 11.5 percent in 2020.

Out of these 300 funds, the top 20 largest pensions in the world — including Japan’s Government Pension Investment Fund, Norway’s Government Pension Fund, the National pension in South Korea, and the Federal Retirement Thrift in the U.S. — experienced the highest growth rates over the last five years. But even the growth at these funds slowed in 2021: The AUM of the top 20 funds in the world increased by 6.6 percent last year, a drop from a 14.6 percent increase in 2020. The top 20, which represented 40 percent of all assets in 2021, invested approximately 53.5 percent in stocks, 27.9 percent in fixed income, and 18.6 percent in alternatives and cash.

While the pension industry broadly is focusing its attention on ESG initiatives, the impact and responsible investing space has fallen under political scrutiny in recent months with some state legislatures, most notably Florida and West Virginia, enacting bans on the states’ public funds investing with ESG-focused asset managers and using these factors to help choose investments. In the study’s ranking, the Florida State Board is ranked the 16th largest pension fund globally, while West Virginia is number 284 on the list.