Investing in accordance with ESG criteria has become significantly more important for Swiss pension funds too. This is shown by the Credit Suisse Pension Fund Study published today, which is devoted to the topic of sustainability. According to the survey of Swiss pension funds, a significant and increasing proportion of assets invested in developed countries can be termed sustainable. ESG criteria are still considerably underrepresented when it comes to investing in emerging markets, but these investments are often used as a way to reduce risk and can also generate additional potential returns. Conviction, reputational risk, and regulatory developments are the key motives for sustainable investing. Pension funds say the main challenges lie in a continued lack of transparency regarding ESG data, as well as the limited comparability of ESG criteria.

The Pension Fund Survey shows that a growing number of pension funds are increasingly taking account of ESG (environmental, social, governance) criteria in their investment activities. The proportion of pension funds investing more than 60% of their assets under management on a sustainable basis has grown from 11% three years ago to a current figure of 28%; according to the survey, this share will grow to nearly half over the next three years (see figure). Swiss pension funds make the bulk of their sustainable investments in Switzerland, Europe, and North America. However, the desire to capture additional sources of return and reduce investment risks are among the factors motivating pension funds to invest sustainably in emerging markets too – particularly China. The lack of transparency in terms of ESG ratings, as well as the risk of greenwashing, are seen as challenges when it comes to investing in emerging markets.

Across all regions, the highest proportion of sustainably invested assets is in equities. Ninety percent of respondents indicated that at least one-fourth of their equity allocation in developed countries is implemented in a sustainable manner. Nearly half of them had done so in emerging markets too, and around one-fourth in the case of China.

Strong motives, but obstacles too on the road to sustainable investing
Conviction, reputational risk, and regulatory developments are among the key motives for investing sustainably. Asked about the obstacles faced by pension funds in general when it comes to sustainable investments, around 80% of respondents cited a lack of transparency and the limited comparability of ESG data. Approximately half of them see a challenge in distinguishing between greenwashing and investments with a lasting positive impact with regard to ESG criteria. The unknown effect on performance, costs associated with sustainable investing, and lack of resources are also listed as obstacles. It therefore comes as no surprise that many pension funds rely on external support for their sustainability efforts. That primarily involves using the services of banks and asset managers, followed by consultants and sustainability agencies. In terms of engagement and voting, external advisors are used by 56% and 61% of funds, respectively.

ESG investments help reduce risk of extreme losses
In the study, the Credit Suisse experts investigate how ESG investments perform versus traditional benchmarks. The results indicate that the MSCI ESG indices offer excess returns, and that these are higher in emerging markets than in industrialized countries. The MSCI World ESG Index and the MSCI Emerging Markets ESG index have generated annualized excess returns of 1% and 1.8%, respectively, versus their benchmarks (MSCI AC World and MSCI Emerging Markets) over the past three years, and 0.1% and 2.8%, respectively, over the past decade. However, the analyses also show that these excess returns seem to be decreasing over time – even if a degree of stabilization has been seen in recent years. Whether outperformance can be achieved through companies or indices with high ESG scores is generally difficult to gauge and depends on many empirical challenges. However, it is clear that the inclusion of ESG factors makes it possible to replicate some of the qualities associated with defensive traits. For instance, higher ESG scores are associated with higher dividends, while ESG scores correlate negatively with equity prices and equity volatility – and this has remained stable over a longer period of time. In particular, the inclusion of ESG scores helps reduce the likelihood of extreme risks materializing. ESG characteristics seem to be linked to greater protection for companies in times of crisis as well as in the event of negative shock waves.

The Swiss Pension Fund Study on sustainability at Swiss pension funds is available in German and French at: credit-suisse.com/pensionskassenstudie