Cerulli Associates cautioned advisors against using environmental, social and governance investing strategies in pension funds in its global edition of the December Cerulli Edge. Even so, the firm acknowledged that the trend is likely to continue.
The report pointed to Volkswagen's emissions scandal as a potential catalyst to accelerate the trend. "Pension fund shareholders of Volkswagen rightly feel aggrieved; not only over the loss to their portfolio valuations, but also because of the health and environmental damage inflicted on society at large," according to the report.
Overall, ESG and socially responsible investing has grown beyond managers passively excluding certain industries, such as weapons or tobacco, from funds to taking a more active approach to corporate responsibility. Cerulli found the world's 500 largest companies spend more than $15 billion per year on corporate social responsibility activities. "It has become big business in itself and an employment bandwagon," according to the report.
Furthermore, Cerulli noted that the United Nations' Principles for Responsible Investment (UNPRI) initiative has grown from 100 asset owners, investment managers and professional services partners representing about $4 trillion 10 years ago, to 1,260 signatories with a collective $45 trillion in AUM. Some of those signatories include CalPERS and the Harvard University Endowment, and BlackRock, JPMorgan and PIMCO.
Cerulli referred to research from Boston Common Asset Management that found good corporate governance pays off for firms by way of better operational efficiency and "good will" among investors through diversity of hiring, human rights policies and environmental considerations.
However, pension funds can't forget their obligations to participants.
"The possible legal implications of looking beyond pure financial returns when making investment decisions need to be weighed up," Barbara Wall, Europe research director at Cerulli Associates, said in a statement.
It may be that losses aren't as bad as the extent of those losses. Cerulli referred to a court case where "church commissioners had acted within the law by deciding that excluding 13% of the market would be acceptable, while excluding 37% would not be.'"
