Europe: Your Top Destination for Sustainable Investment

European equity managers have embraced ESG investing the most, research has found, while US asset owners are becoming more interested in responsible mandates.

European equity managers have become “regional leaders” for incorporating environmental, social, and governance (ESG) factors into their investment processes, according to research from Russell Investments.

In a research report titled “Are ESG tilts consistent with value creation in Europe?”, Russell staff said environmental considerations in particular had become more important to European investors in recent years.

“Public plans and non-profits are most likely to incorporate ESG factors because of pressure from donors, students, taxpayers, and other constituents.” —Susana Schroeder, CerulliRussell scored individual stocks on each of the three ESG strands, and combined these to give scores for equity market indices and active manager portfolios. The company found that ESG scores for European equity fund managers are higher than for US or global managers.

“Moreover, we have observed a clear increase in the time and effort dedicated to ESG by European equity managers as a community in recent years and broad support for its importance to investing,” the researchers said.

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“Most typically, we observe that positive ESG criteria are seen as an indicator of higher quality stocks,” they added.

Mike Clark, director for responsible investment at Russell, highlighted a UK Law Commission report, published last year, that stated pension funds should consider “factors which are financially material to the performance of an investment”, including ESG factors.

In separate research, Cerulli Associates found more than half of US-based managers received requests for socially responsible investing and ESG mandates from institutional investors last year.

“There is increasing acceptance among investors and managers that ESG factors, such as hazardous waste disposal and predatory lending practices, can have a material impact on a company’s financial wellbeing,” said Susana Schroeder, senior analyst at Cerulli. “Public defined benefit plans and non-profits are most likely to incorporate ESG factors into their investment process, because of pressure from donors, students, taxpayers, and other constituents.”

The two reports contrast with research published yesterday by campaign group ShareAction, which claimed that many managers were still falling short of reporting requirements in the UK’s Stewardship Code.

Home > News > Asset Allocation > E&Fs Put Faith in Alts, Wind Down Equities

Asset Allocation February 2, 2015

E&Fs Put Faith in Alts, Wind Down Equities

Moderation is key to asset allocation in 2015, according to NEPC.

Endowments and foundations plan to downsize their exposures to equities and bump up allocations to alternatives in 2015, according to NEPC.

The consulting firm’s Q4 2014 survey revealed that despite bullish views on the US economy and domestic equities, investors will seek to moderate their allocations.

Nearly 70% of respondents said they would decrease their allocations to US equities while 36% said they believed the asset class would be the best performer in 2015. The survey also showed 54% of investors expected the S&P 500 to return 6% to 10% this year.

“Given the strong multi-year bull run we’ve experienced in domestic equities, we’re not surprised that endowments and foundations are dialing down their allocation and shifting to other asset classes,” Scott Perry, partner at NEPC’s endowment and foundation practice, said.

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NEPC1 (Source: NEPC)

The firm advised that investors “should guard against the natural instinct to project [strong investment gains] into the future” as they could disappoint over the long term.

“As we look forward, we believe moderation is a key theme: moderation in US central bank stimulus, moderation in expected investment returns, and moderation in placing concentrated bets in focused investment sectors,” NEPC’s asset allocation committee said.

Endowments and foundations were particularly bullish about private markets, with 33% of respondents saying they would increase their allocations. More than a quarter of investors also said they would up their exposures to hedge funds, absolute return strategies, and real assets.

NEPC2 (Source: NEPC)

The survey also showed more than half of responding endowments and foundations were concerned about the slowdown in the global economy, particularly in relation to their near-term performance.

Investors were increasingly uneasy about the potential for global deflation, NEPC said, with 14% saying it posed the greatest threat to their investments.

As such, three-quarters of respondents said they would maintain their inflation hedging allocation this year. About 20% said they would up their allocation, of which the majority would increase both liquid and illiquid assets, possibly due to opportunities created from the recent disorder in energy prices.

NEPC also found the majority of endowments and foundations said they would maintain their fixed income allocation in 2015 and expect interest rates to rise.

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