Addressing climate change in investment portfolios
The third edition of the DWS-sponsored CREATE passive investing report turns the spotlight on global warming. It surveys 131 pension plans in 20 jurisdictions with a combined AuM of €2.25 trillion asking two questions: how are pension plans developing their broad passive holdings? And why, how and to what extent are asset holders factoring climate change into their passive portfolios and their future investment plans?
Selected key points from the survey
Now that passives are entrenched, focus is broadening to thematic, including climate-related, investments.
- Almost 90% of plans favour equity investing for their passive investments (70% via traditional cap-weighted index funds).
- 27% expect smart beta allocations to grow more than 5% per annum over the next 3 years.
- 57% expect overall ESG allocations to grow more than 5% per annum over the next 3 years.
- While climate-linked investment is embedded in passive asset allocation (26% commit over 15% of their
passive funds to the segment), 56% still have no allocation at all. - Over the next three years, 65% of plans intend to increase their climate-linked passive allocations.
- 70% select asset managers on the basis of their 'green' track record for climate-related investments
Passives are anchored in the core portfolio – and thematic passives will grow
Passive investments' 31% share of plan portfolios is marginally down on the past two years. The Covid-19 crisis hit traditional index funds in particular, while the share of ETFs, smart beta and segregated accounts have risen as portfolios have shrunk. Reliance on equities has risen, with 89% of plans now investing in them, versus 50% for fixed income. Holding periods continue to extend in the belief that 'time in' the market matters more than 'timing' the market. Passive funds now stand alongside active funds as part of a diversified portfolio that continues to
rely on buy-and-hold investing and mean reversion.
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