Despite Pressures, Pension Plans Expect ESG Exposure to Grow

They expect the ESG growth in private equity and debt.

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Pension plans say they expect ESG-related investments to become more prevalent in their private equity portfolios.

A large portion of 152 global corporate and public pension funds recently surveyed by Apex Partners — 58 percent — said they expect allocations to private equity that accounts for environmental, social, and governance factors to rise over the next three years.

The trend comes amid a complex investing environment for ESG strategies overall. In recent years, ESG funds that invest in listed securities have underperformed, according to Apex. This, coupled with pensions’ rising investments in alternatives, has opened up questions about the best approach to ESG in private equity and private credit.

At the same time, though, U.S.-based pensions, particularly those in Republican-controlled states, are contending with lawmakers who are trying to prevent them from investing in the strategies and with firms that engage in ESG practices at all. While most of the controversy is about fossil fuels, some allocators in the U.S. are increasingly cautious about using terms like ESG when talking about their investments, fearing they will be vilified by critics.

Against this backdrop, Apex found that 35 percent of the pension funds surveyed do still have ESG investment goals. “Our data show that despite the noise of recent months, ESG is here to stay as a key consideration for allocators, and the dynamism and growth focus of the private markets mean that they are well placed to help their portfolios become ESG aligned,” said Emma Bickerstaffe, managing director of ESG and sustainability in a statement.

According to Apex, some 66 percent of pensions surveyed said they are using a stewardship and proxy voting model to engage in ESG investing. This approach involves directly engaging with companies they invest in via informal conversations, shareholder voting, and filing shareholder resolutions.

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Just over half of respondents — 52 percent — said they choose to invest with companies that have high ESG scores, which they believe can result in better investment outcomes. Just under half, meanwhile, are actually integrating ESG risk and opportunity analysis into their investment process.

Both exclusion and impact investing are less popular among those surveyed.

By and large, these funds don’t make up a massive portion of these pension allocators’ portfolios. Just 8 percent of pensions surveyed said that more than a tenth of their portfolio is invested in ESG private equity.

Apex suggests that venture capital firms may work with early stage companies that have promising ESG characteristics, while in a large buyout scenario, active managers like PE can drive ESG outcomes and returns.

Only 1 percent of respondents had more than 10 percent invested in ESG private credit, but pensions’ investments in the the asset class remain relatively low.

Private debt funds are uniquely suited to include ESG in their investment process, though. In addition to lending to companies with ESG mandates, they can use loan covenants that require things like improving the energy performance rating of commercial buildings, according to Apex.

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