Divest or engage: Europe’s institutional investors take different routes to same destination
Size and location are among the factors influencing the decarbonization routes of European institutional investors, according to the latest research from Cerulli Partners.
While the firm says some investors in the region are pursuing their decarbonization efforts by divesting from unsustainable investments ‘and working with asset managers to create new investment vehicles’, others are holding onto ‘dirty assets’ in a bid to effect change through engagement.
‘The thinking behind the latter approach is that divesting could result in the assets being owned by less engaged owners, resulting in potentially less change,’ says Cerulli.
The firm's managing director for Europe also says the pressure is currently focused on larger corporates. ‘Cerulli’s research indicates that insurers’ response to decarbonizing fixed income can be segmented by size of company and location,’ notes André Schnurrenberger, adding that ‘smaller companies are not under as much scrutiny as larger companies, resulting in less urgency to decarbonize.’
The findings are published in the July 2022 issue of The Cerulli Edge – global edition.
Whatever route asset owners are taking, the firm describes decarbonization and achieving net-zero as ‘key goals for most institutional investors’. Its research shows that more than nine in 10 (92 percent) of asset owners are already committed, or planning to commit in the near term, to reaching net-zero. Furthermore, for 66 percent, an asset manager’s commitment to net-zero is a very important factor when hiring.
Cerulli says a range of considerations – from mitigating risk to EU legislation, fiduciary duty and reflecting stakeholders’ interests – are driving decarbonization efforts that incorporate ESG considerations into the investment decision-making process.
Cerulli finds that on average, 30 percent of insurers and pension funds across the six countries covered in the study (Italy, France, Germany, Switzerland, Netherlands and the UK) plan to restructure part of their fixed-income portfolio, compared with more than half (53 percent) that plan to run their fixed-income portfolio to maturity.
Among some of the key regional findings is that the UK has the highest proportion of insurers planning to restructure part of their fixed-income portfolios (48 percent), while just under a third (32 percent) say they plan to run their fixed-income portfolios to maturity.
At the other end of the scale, 70 percent of insurers in Switzerland expect to run their fixed-income portfolios to maturity, though Cerulli says decarbonization is an ‘important theme’ for these investors.
In the Netherlands, a quarter of insurers are still unsure whether they will restructure part of their portfolio or run it to maturity, but Cerulli notes that ‘several have made their ESG targets public’.