The majority of top pension funds have cited a lack of consistent ESG definitions and reliable data as key reasons why the adoption of passive funds related to climate change has been slow, according to a survey conducted by CREATE Research.
The survey, which interviewed 131 pension funds with €2.25trn assets under management (AUM), found 60% of respondents see data and definitional problems as a key constraining factor to the growth of climate-related passive funds.
Adoption rates of climate-related passive funds have been slow relative to wider passives. According to the survey, just 36% are at the “already mature” or “implementation phase” stages for passive funds related to climate change versus 81% for passives in general.
The report highlighted the problem of having over 150 major ESG data vendors worldwide which are often “yielding radically different assessments” of the same companies.
Furthermore, the report added the data vendors are not subject to any of the regulatory oversights traditional credit rating agencies have.
The variety of ESG data makes it far harder to create a rules-based passive strategy suitable for investors which in turn has led to a slower uptake of climate-related passives.
The research found 56% of respondents have no exposure to climate-related funds in the passive bucket of their portfolio.
Amin Rajan, founder and CEO of CREATE Research and author of the report, explained this is because climate change has typically been viewed as an inexact science by pension funds.
“Hence, initially, they have preferred to invest with specialist active managers who have long developed an infrastructure of skills, technology and data to build up a good track record in theme investing,” he added.
Furthermore, the report said it has only been over the past two years that pension funds have viewed passives as a vehicle for pursuing specific themes such as the environment “especially as index providers have also shifted up a gear with improved offerings”.
Overall, 65% of respondents said they are planning to increase their exposure to climate-related passives over the next three years.
This, the report said, will be driven by the European Union’s action plan on sustainable finance including the implementation of two climate change benchmarks last year by the EU Technical Expert Groups.
The two benchmarks – the EU Climate Transition benchmark and the EU Paris-aligned benchmark – are being tracked by the major index providers which have been launching indices over the past six months.
“Notably, unlike previous benchmark models, these will be overseen by the regulators,” the report said. “They also go well beyond the existing climate benchmarks in one crucial sense: they not only have a carbon reduction target, but they also have a long-term plan with a clear end goal.”
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