Environmental issues still dominate when it comes to ESG for institutional investors in Europe, but social and governance factors are catching up, according to Mercer's European Asset Allocation Insights report released Wednesday.
Allocations to alternatives are now almost on a par with equities, averaging 22% of portfolios, with some investors in the U.K. and Germany even higher.
Among defined benefit investors, 20% are increasingly seeking diversification via alternative asset classes such as growth fixed income, private equity and real assets.
The report about the survey results identifies emerging trends among 850 institutional investors with €1 trillion ($1.17 trillion) in assets in 11 countries.
Mercer found that 27% of respondents plan to increase attention to social factors such as human capital and labor rights issues over the next year. On environmental issues, 24% of asset owners said they will deepen their focus on such things as biodiversity and natural capital.
On governance, 53% of investors plan to learn from the pandemic by reviewing their investment strategy, manager mandates or plan governance.
The survey found more investors using low-carbon or climate-related indexation, 26% compared with 6% in 2020. It also found that most European investors integrate ESG into all aspects of their operations, including investment manager selection (83%), investment manager monitoring (88%), reporting (79%) and asset allocation (64%).
Regulatory drivers as a motivator for considering ESG risks decreased in significance, at 67% compared with 85% last year.
"Whilst an extremely challenging time for many investors the pandemic period also saw a surge of assets into sustainable investment funds across Europe," said Joanne Holden, Mercer's global head of investment research, in a news release. "Investors are waking up to how the elements of ESG are connected, indeed how people and the planet are connected. And with corporate responsibility at the top of board agendas, more companies want to play their part in supporting issues such as human rights, equal pay and social equality.
"It can take relatively small steps to improve portfolios' ESG considerations, including a simple review to provide insight on current ESG credentials. We encourage schemes to consider identifying the key actions that will deliver the most impactful change," Ms. Holden added.
