Investing in a sustainable tomorrow ESG integration in European pensions Who should read this report, and why Addressing environmental, social and governance issues are crucial to meeting the investment needs of current and future generations. This paper examines the use of these factors by European pension investors. As long term investors, pension funds should be well placed to benefit from incorporating Environmental, Social and Governance (ESG) factors into their investment decisions. But in reality, many European funds — while increasingly interested in the potential of ESG — have yet to fully capture these benefits. That is why we have produced this paper. It not only reflects the views of our own professionals but also of some of Europe’s leading adopters of ESG investing — which we define, in this paper, as weighing ESG factors equally alongside financial considerations. Our goal is to help European pension funds to grasp the potential benefits of ESG investment, and to avoid the potential risks of inaction. We hope the report will be of practical use not only to pension funds, but also to the organizations that help them achieve their goals. The methodology of our research process involved: • Conducting a desk-based review of academic • Interviewing a number of external experts from literature, commercial research, public sector third party organizations focusing on identifying reports and industry publications. and understanding best practice. This included representatives from several large European pension • Seeking out and analyzing the views of EY subject funds that already make significant use of ESG matter professionals on pensions, investment, ESG and investing. The interviews took place between April sustainability from across our EMEIA member firms. and June 2017. Acknowledgments We would like to thank all those who contributed to our research, and especially our external interviewees. In particular, we are grateful to: Andreas Stang, PFA Asset Management Chiara Rinaldi, EY David Griffiths, BT Pension Scheme Mark Veser, EY Frank Wagemans, VBDO May Breisacher, EY Graeme Griffiths, UNPRI Nicolette Opdam, EY Kirstine Lund Christiansen, P+ Oliver Quinn, EY Pelle Pedersen, PKA Asset Management Philip Wheeler, EY Youri Lie, EY We are extremely grateful to all our interviewees for taking the time and effort to share the benefits of their experience with us. Additional research and analysis was provided by Andrew Mills of Insight Financial Research. Contents 1. Our focus on “sustainable performance” 4 2. Key observations: A complex, fast-changing picture 6 3. Key recommendations 9 4. Conclusions: Delivering sustainable performance 14 References 16 Appendices Appendix 1 — Glossary of ESG-related terms 17 Appendix 2 — Relevant studies for further reading 18 Contacts 19 Investing in a sustainable tomorrow. ESG integration in European pensions. | 3 1. Our focus on “sustainable performance” Why this issue matters and governance factors — including as part of a strategy of active ownership — but without prioritizing them above Pension funds’ long term horizons mean they are ideally traditional financial goals. In our view, the ultimate rationale placed to benefit from ESG investing, and a number of for ESG investing is simply to better understand investment large European funds already find value in the use of ESG risks and maximize long term investment returns. factors. However, studies suggest that many funds have so far been slower to adopt ESG investing than other We have focused on occupational “Pillar II” schemes, institutional investorsi. typically sponsored by companies, local authorities, unions or industry bodies. That includes defined benefit (DB) and This apparent reluctance may reflect some collective defined contribution (DC) schemes, whether misunderstandings about ESG. Many pension fund managed by trusts or administered by insurers and asset trustees seem to believe that ESG investing limits managers. Unless otherwise indicated, we exclude public diversification, leads to underperformance or conflicts with schemes (Pillar I) and personal insurance products (Pillar III). their objectives. That might explain why many pension funds are yet to fully realize the potential benefits of ESG. How ESG Investing varies across Europe’s pension markets What this paper addresses Whilst this paper is not a market-by-market review, it is This paper begins by considering the arguments for worth highlighting a few national variations. European pension funds to adopt ESG investing. These include a number of industry developments and regulatory For example, ESG adoption is comparatively common in requirements. Arguably, it is the potential long term the Netherlands and Nordic countries. One recent study investment benefits that carry the greatest weight — showed that 90% of Dutch pension funds have adopted both in terms of risk reduction and, potentially, of some elements of ESG investingii. outperformance. However, we also examine the practical In contrast, ESG investing is less widespread in two barriers that make it difficult for many pension funds to of Europe’s other large pension markets, the UK and explore the growing business case for ESG investing. Switzerland. Even so, both markets are innovative and a This is followed by some recommended best practices on few individual funds stand out as ESG adopters. The use how European pension capital could make better use of of ESG factors is also comparatively immature in countries ESG investing. Some of the most important themes are such as France, Germany, Spain and Italy. the need for understanding, clarity, logic, collaboration We see the most important drivers of these national and co-ordination. Europe’s pension funds are continually variations as: improving their understanding and management of risk • Levels of concentration: For example, there are 20 and return. We see the evolution of ESG investing as an pension providers in Denmark, but more than 40,000 important element of this process. We also expect ESG schemes in the UKiii. adoption to increase. • Regulation: Many institutional investors in Belgium, In our view, pension funds — and other investors — should Denmark, France, the Netherlands and Sweden are ultimately aim to integrate ESG considerations into their required to disclose their approach to ESG investing; everyday activities. But our research suggests that that however those in Finland, Poland, Slovakia and goal remains far off for many. We see many practical Switzerland are not required to do soiv. steps that funds of all sizes can take towards this goal. So the paper concludes with a list of suggested actions for • Investment practices: For example, professional funds individual funds, based on our research and drawing on the in France invest relatively heavily in government bonds. best practice of experienced ESG investors. • Structural features: For example, many German companies hold pension liabilities on their balance sheet. How we define the issue • Legal differences: For example, the UK system is based The use of ESG factors should not be distinct from everyday on common law, but many Western European countries investment practices. On the contrary, we believe it should rely on civil codes. ideally become “business as usual” for all investors. But for the purpose of this paper, we use the term “ESG investing” • Variations: For example, in the level of member to describe the issue. consultation on ESG investing. The acronym “ESG” is often confused with distinct concepts We return to several of these factors later in the paper. such as impact investing. In this paper, we define “ESG investing” as considering the impact of environmental, social 4 | Investing in a sustainable tomorrow. ESG integration in European pensions. The European pensions landscape Denmark Sometimes described as the world’s “best pension market”, Denmark has a large, well-funded system comprised of a public pillar, a statutory occupational scheme, and a range of voluntary occupational and voluntary private schemes. The average size of voluntary occupational schemes is comparatively large, and strong member engagement is a feature of the system. These factors have helped to drive relatively widespread adoption of ESG investing. France The French pension system relies heavily on pay-as-you-go public provision. Some industries operate pension funds, but these are usually run by insurers. As such, the effects of Solvency II tend to discourage the large scale equity investment, limiting the adoption of ESG investing. Instead, pension assets are dominated by government bonds. Germany The German market features a strong public pillar but a fragmented occupational pension sector. Occupational funds may be managed on sponsor’s balance sheets (“direct promise”), via insurance policies taken out on behalf of employees (“direct insurance”) or via Contractual Trust Agreements. In addition, Pensionskasse and Pensionfonds are typically hosted by insurers. This complexity leads to small average fund sizes. So, despite the strength of the German Green movement, comparatively little pension capital has adopted ESG investing. Netherlands The Netherlands’ industry-based pension funds are among the world’s largest. A number of leading schemes use captive investment advisors for their consulting and management needs. Some of these advisors also oversee external funds. The overall effect is to concentrate knowledge and expertise; this, together with political and corporate support, has helped to encourage high levels of ESG investing. Sweden Per capita, Sweden’s pension system is one of Europe’s biggest. The public pension comprises a segregated pay-as-you-go scheme, a premium pension scheme and a means-tested pension. Defined benefit occupational schemes often remain on sponsor balance sheets, with or without a corresponding pension fund, but with insurance against deficits and defaults and with nationally agreed benefits. This centralization has helped to facilitate ESG adoption by pension investors. Switzerland The Swiss market falls outside EU regulations, although Swiss insurers and investment managers have significant international operations. Domestic occupational schemes are relatively fragmented, with large and medium-sized companies holding assets and liabilities in a subsidiary — often without professional management. Average levels of ESG adoption are low, but some funds have elected to co-operate over ESG investing. UK The UK’s long-established pension market is large and complex, reflecting periodical reviews and actions by different governments. One recent development was the introduction of auto-enrolment for most employees. The occupational pillar is dominated by a host of DB schemes, increasingly closed to new members. Many are small and struggle to overcome the limitations of their size when trying to implement ESG. DC scheme assets are now growing rapidly and beginning to offer more flexibility for members to select ESG themed funds. Investing in a sustainable tomorrow. ESG integration in European pensions. | 5 2. Key Observations: A complex, fast-changing picture The drivers of ESG investing for European pension funds and some of the major barriers to adoption. A combination of developments are pushing ESG investing up The growing focus on stranded asset risks by a majority European pension funds’ agendas. We group what we see as of institutional investorsix is also increasing pension funds’ the most important drivers into three areas: awareness of the potential scale of ESG risks. Commitments such as the Montreal Pledge, made by 120 institutions External requirements managing US$10tn, only serve to highlight these issues. Regulation addressing ESG themes has developed rapidly ESG-related actions by large corporations are relevant to in recent years. There are now nearly 300 pieces of ESG- many pension funds. HSBC’s decision to select a climate- related investment regulation worldwidev. In the EU, the tilted fund as the default for its UK scheme is a notable IORP II Directivevi requires pension schemes to consider ESG recent development in the DC space. More broadly, many and to disclose their approach. The Non-Financial Reporting listed companies are improving their disclosure to give Directive puts new requirements on listed insurers and, in them access to ESG investment capital. markets like the Netherlands, on large pension schemes. National regulators are also putting more focus on ESG Lastly, many asset managers are making transformative investing. Regulation is rarely transformative on its own, investments in their ESG investing capabilities, including but it is helping to increase awareness and debate around the emergence of ESG-tilted passive products. This trend ESG investing. As Graeme Griffiths, Director of Global is highlighted in BlackRock CEO Larry Fink’s 2017 letter to Networks and Outreach for UNPRI puts it: “Quite a lot of CEOsx, not to mention the efforts of many European asset institutions find regulation ineffective, owing to different management bodies to promote ESG investing. interpretations in different markets. But research we have done suggests that regulation does have a positive effect on Fiduciary evolution levels of disclosure”. Pension funds in common law jurisdictions such as the UK and Ireland are under a fiduciary duty to prioritize Recent years have also seen new legislation, especially the interests of beneficiaries. This has traditionally been in the environmental sphere. Most of this is aimed at interpreted as maximizing financial returns, encouraging corporations and asset managers. France’s Article 173 some trustees to view ESG investing with skepticism. But is one example that requires specific climate change legal definitions are evolving, especially in the UK. In 2005, disclosures from institutional investors. Legislation outside a leading law firm concluded that addressing ESG risks Europe can also have an indirect effect. California’s was consistent with fiduciary duty under English lawxi. In requirement for the state’s public sector retirement 2014 the Law Commission reached the same opinionxii and schemes CalPERS and CalSTRS to divest companies in 2016 the Pensions Regulator updated its guidance for generating half their revenue from thermal coalvii is a trustees accordingly. The BT Pension Scheme responsible case in point. investment statement illustrates this thinking: “The Trustee Lastly, European pension funds are influenced by has a fiduciary responsibility to meet the Scheme’s liabilities, supra-national initiatives. One example is the Paris and as a long-term asset owner, considers sustainable Agreement on climate change, agreed at the COP21 factors to improve long-term risk-adjusted returns.”xiii conference in 2015. Another is the set of non-binding standards created by the International Integrated There is growing evidence for the benefits of Reporting Council. ESG Investing Industry developments Academic research indicates a link between corporate sustainability — a company integrating ESG goals into its Pension funds are sensitive to the actions of other strategy — and company financial performance. A recent institutional investors, such as Norway’s oil fund divesting meta-study found a firm empirical link (non-negative coal stocks in 2015, AXA withdrawing from tobacco in 90% of cases) between companies’ ESG ratings and stocks in 2016 and Swiss Re’s plan to benchmark its financial performancexiv. portfolio against ESG indicesviii. Public commitments to ESG investing by large pension funds including Unilever, BT, Portfolio level studies are less conclusive, perhaps due to the Philips and the UK Environment Agency have also affected impact of short term market fluctuations and transaction thinking in the sector. The growth of the UN’s Principles costs. Even so, a growing number of credible studies for Responsible Investment (PRI) to 1,500 signatories suggest that ESG investing can have a positive effect on managing more than US$60tn is another influential factor. risk-adjusted returns for pension funds and other investors. 6 | Investing in a sustainable tomorrow. ESG integration in European pensions. The evidence on risk reduction is particularly strong. Pension funds face obstacles to adopting Several recent studies suggest that good ESG scores ESG investing reduce costs of capital and volatility, increasing average Confusion over ESG terminology is only one challenge for returns. An investment bank that reviewed more than pension fund investors. Many European funds also face a 10,000 mutual funds over seven years found sustainable range of practical barriers to making greater use of ESG equity funds exhibited equal or lower median volatility than investing. This is particularly — although not uniquely — traditional funds 64% of the timexv. Another study found true for DB schemes. that good standards of ESG can reduce a firm’s cost of equity by up to 1.8%xvi. • Limitations of data and analysis. Pension funds are increasingly aware of how hard it can be to quantify ESG The Governance element of ESG appears to have the risks and opportunities. The proportion of investors greatest impact. One asset manager finds that poorly seeing non-financial disclosures as inconsistent or governed companies underperform by an average of 30 unverified actually grew from 20% in 2013 to 42% in basis points per monthxvii. The last few years have shown 2016xxiv. ESG data is often unreliable and inconsistent. how corporate environmental scandals — wiping out billions Environmental disclosure can be complex and in market value — were in some instances foreshadowed contradictory, while subjectivity makes many social by specialist ESG agencies downgrading their governance factors particularly hard to quantify. There is also an ratings. But governance is not the full story. Environmental absence of proven ways to incorporate ESG factors into risks have been found to increase credit spreadsxviii, and existing analytical and valuation models. However, a many investors believe that poor governance can lead to range of commercial, academic and public bodies are increased environmental and social risksxix. making strenuous efforts to address these shortcomings. There is also a small but growing body of evidence Some see this as a vital stepping stone towards wider suggesting that ESG investing has the potential to deliver adoption by pension funds: “We need much better data outperformance. One noted academic paper found and research. Good academic research is particularly that high sustainability equities outperformed a low important. Luckily we are seeing a number of positive sustainability alternative by 46% over 17 yearsxx. More initiatives such as the Task Force on Climate-related recently, a study in 2015 found that one ESG equity index Financial Disclosurexxv” says Pelle Pedersen, Head of outperformed a broad market index by an average of Responsible Investment at PKA Asset Management. 0.45% every year for 25 yearsxxi. Looking beyond equities, • Lack of scale and resources. Many European pension a 2016 study found that a positive ESG tilt delivered funds are comparatively small, making it hard to formulate a small but steady outperformance in fixed incomexxii. ESG goals or conduct their own ESG analysis. This group And in emerging markets, Denmark’s PKA pension fund is also unlikely to be offered segregated accounts by asset has reported annual returns of 20% on its microfinance managers, limiting their ability to tailor funds to their ESG investments since 2012xxiii. goals. In fact, many smaller funds are unsure how to even begin tackling ESG. In the words of Frank Wagemans: Of course, none of these findings suggest that ESG “Smaller funds tend to have little influence on product investing will always outperform, and all studies stress the development. Many boards don’t have the knowledge or importance of manager selection and due diligence. But resources to question asset managers on ESG.” they clearly show that ESG investing need not be ‘a noble way to lose money’. • Co-ordination challenges. Pension funds can struggle to communicate their ESG investment goals along what No investment research is ever conclusive. But credible is often a lengthy value chain. In the UK for example, it evidence (in Appendix 2 we provide a list of notable studies can be hard to co-ordinate effectively between sponsors, published between 2011 and 2016) suggests there is no consultants and external asset managers, especially financial reason for European pension funds to ignore ESG when different players have different financial incentives. investing. It could be argued that boards and investment It is not uncommon for trustees and asset managers to committees have a duty to give it active consideration. To each believe the other is taking responsibility for ESG. dismiss such a large body of research out of hand does As Graeme Griffiths explains: “Smaller pension funds not seem consistent with good governance. As Frank face real obstacles, in terms of investment skills and Wagemans, Senior Project Manager for Responsible resourcing, and can be very dependent on investment Investment at the VBDO puts it: “Many people’s consultants.” However, not all European markets are so perceptions are surprisingly stuck in the past. A growing complex. In the Netherlands, a single fiduciary advisor body of academic research suggests it’s important for all often provides a pension fund with both consulting and investors to look at ESG factors.” asset management services. And as Andreas Stang, Head of ESG at PFA Asset Management says, “Here in Denmark, the value chain is a bit shorter — that can make it easier for large asset owners to engage direct with investee companies.” Investing in a sustainable tomorrow. ESG integration in European pensions. | 7 • Portfolio construction. Many pension funds are • Confusion over ESG terminology. In common with increasingly following liability-driven investment other investors, pension fund trustees and analysts strategies, with high allocations to bonds. This can make are often confused by the absence of definitive ESG it harder to implement ESG investing, which is often terminology. To begin with, ESG investing is easily seen as specific to listed equities. The problem can be mistaken for similar but distinct concepts such as acute in markets like France, where pension funds often “impact investing”, that prioritize ethical factors above invest 75-80% of their portfolio in government bondsxxvi. financial performance. (See Appendix 1 for a glossary Funds with heavy allocations to passive funds may also of ESG-related terms). The confusion over terminology struggle to implement ESG factors. However, there are represents a material barrier to ESG adoption; in the rapid developments in this area and a number of asset view of one investment consultant, perhaps the most managers now offer thematic and tilted passive funds important of allxxviii. That is especially true for smaller tracking ESG indices. pension funds without relevant internal expertise. The contrast with the clarity of a single, quantitative • The low yield environment. Low investment yields are measure such as Return on Investment (RoI) may be putting exceptional pressure on many DB schemes’ one factor behind the relatively slow adoption of ESG funding levels. This is particularly true in the UK, investing by some pension funds. where benefits are rarely altered but investment policies are restricted by regulation. As a result, some Furthermore, “ESG” not only encompasses three key DB schemes are largely focused on reducing deficits factors, but also a wide range of sub-factors. Nor are or achieving risk transfer. In these circumstances, environmental, social and governance homogenous. ESG investing may seem a less pressing goal. One Most companies can manage the governance factors with German pension fund association has stated that ESG comparative ease, but environmental and social factors can factors are simply a lesser priority than managing the be more difficult to quantify, assess or control. low interest rate environmentxxvii. ESG sub-factors Environmental Social Governance Climate change and carbon Labor relations Board diversity emissions Diversity agenda Auditor independence Energy efficiency Employee safety Corruption and bribery Pollution Product safety Anti-money laundering Use of natural resources Human rights Business ethics Waste management Clean energy and technologies Child labor Cartels and price fixing Biodiversity Working conditions Compensation policies ESG investing also overlaps with other investment green bonds. We explore a few of the different approaches trends — not least, the growth of active stewardship. that pension funds and their advisors can take when Given that many investors and advisors have long implementing ESG investing in our Key Recommendations. scrutinized the management quality of their investments, Even the largest pension funds can face significant this aspect of ESG investing has arguably been going obstacles to adopting ESG investing. A better on for years under another name. understanding of these challenges is essential to enabling Finally, there is no single way to implement ESG investing. funds to benefit from ESG considerations. This also shows In the words of Pelle Pedersen: “There is no right way the vital importance of co-ordination and co-operation to execute ESG, and there is a huge variety of methods across the value chain. We explore these and other themes and definitions.” It is not as simple as switching into a in greater detail in the next section. particular asset class, such as renewable infrastructure or 8 | Investing in a sustainable tomorrow. ESG integration in European pensions. 3. Key recommendations How funds — supported by those that serve them — could adopt and benefit from ESG investing. ESG should be debated logically, • Resisting the temptation to search for “absolute not emotionally proof”. No investment strategy performs predictably in all circumstances. Calls from doubters for ESG We believe that debating ESG investing in the right way is to “prove” its value beyond dispute are unrealistic. crucial to successful adoption. Arguments in favor of ESG “Sceptics often say: ‘Prove it’. We respond: ‘Can must emphasize logic, facts and good investment practice. you prove that considering ESG factors hurts The experience of pension funds that already consider ESG performance?’” says Frank Wagemans. factors suggests that achieving the full benefits of ESG investing depends on: We believe that pension funds — and other investors — should aim to incorporate ESG investing into their everyday • Understanding that “values” do not outweigh “value.” investment practices. But for this to happen, ESG needs ESG investing aims to make rational judgements about to be debated in the same way as any other investment the financial risks and returns that flow from ESG issue. As Andreas Stang explains, “ESG should be a value- factors, especially in the long term. As Pelle Pedersen added function within the investment process, not separate puts it, “I try to convince people about the financial from it. ESG factors are not supposed to go against value benefits of ESG by talking about deriving long term creation — they should go hand in hand with other financial value from the world’s shift towards a different kind indicators. Don’t ask ESG questions for the sake of it; ask of growth.” them because they’re valid investment questions.” • Thinking in terms of risk and return. Focusing on risk A solid understanding of ESG investing is vital and return not only helps to engage colleagues. It is also vital to avoiding investment errors. In the words Adopting ESG investing is not as simple as switching from of Graeme Griffiths: “Instead of talking about moral one asset class to another. But nor does it need to be considerations, we make the case to value-driven so radical. To benefit fully from ESG investing, pension investors that ESG aids risk management and can funds need to ensure they understand the variety of ways deliver better long-term investment outcomes.” in which it can be executed. Most ESG strategies are actively managed, but the emergence of passive products • Valuing the role of investment professionals. Effective is increasing the potential range of investment techniques. ESG investing depends on good portfolio management. Some of the most important approaches include: ESG considerations should not over-ride the views of a trusted manager. Investment professionals are used to • Divestment and exclusion: Exclusionary screening evaluating imperfect data and it is for them to judge the remains the most popular ESG Investment techniquexxx. pros and cons of every investment. As Andreas Stang It has the advantages of being cheap, easy and puts it, “No ESG data conveys the ultimate truth. But transparent. But it can be simplistic and removes it would be equally wrong to assume that any non-ESG the potential to boost returns by engaging with data possesses that ability.” investee companies. Sector exclusions can also harm diversification. • Questioning myths about underperformance. As already discussed, the notion that ESG investing leads • Best in class: Sometimes called “inclusive screening,” to underperformance is not supported by research. A this is where investors tilt their exposure towards strong recent report by one asset manager claimed that 84% or improving ESG performers in each sector, or set an of institutional investors are satisfied with the financial ESG hurdle that all investments must clear. performance of their ESG strategiesxxix. • Thematic investing: A variation on impact investing • Doubting exaggerated claims. There is plenty of credible that involves selecting an ESG-related theme (perhaps research that can be used to argue for ESG investing. based on a development goal, such as clean water). Exaggerated claims based on selective interpretations This theme is then used as the basis for building a of past performance are unnecessary and quickly portfolio of related securities. undermine the speaker’s credibility. “When arguments about performance need to be made, draw on credible academic research. You won’t overcome skepticism by promising Nirvana” suggests Pelle Pedersen. Investing in a sustainable tomorrow. ESG integration in European pensions. | 9 The desire to avoid critical ESG risks — such as asset • Helping pension funds to assess the ESG risks and stranding or human rights violations — means that many opportunities of diverse asset classes: these can pension funds begin with exclusion before moving on to include equities, fixed income, multi-asset funds other techniques. As Frank Wagemans explains: “Many and alternatives such as real estate, private equity pension funds start defensively — typically with exclusion. and infrastructure. They then move from a pure risk focus to using ESG data • Enabling pension funds to benefit from active alongside financial data. Over time they may engage engagement and stewardship: rather than “leaving more closely with companies, and perhaps begin to use value on the table.” impact investing.” Equity investors in particular can use their ownership This transition is understandable, but it can create the stakes to positively influence company strategy. Many impression of a rigid spectrum ranging from “cautious” investors see this as one of the most financially rewarding steps like exclusion to “advanced” techniques such as aspects of ESG investing. thematic investing. This is misleading and implies that all ESG investors need to follow the same path. Overall, we see integration as the most intellectually coherent way to implement ESG investing. As Pelle In fact, pension funds can, and do, use a range of Pedersen explains, it helps pension funds to make better techniques to implement their ESG investing goals. long term decisions: “We view our approach to ESG as These can be used in isolation, in combination; or as thinking about what the world will look like in 2050, and part of a broader strategy of ESG integration. trying to get ahead of that vision in investment terms.” By weaving ESG into existing processes, integration allows ESG integration should help to achieve the funds to fully leverage their own knowledge and the greatest benefits expertise of consultants and asset managers. There is a growing view among large institutional investors that “ESG integration” represents the optimal way to implement ESG investingxxxi. Integration means incorporating ESG factors into every stage of the investment process from the setting of goals, through asset allocation to the details of portfolio construction. As Kirstine Lund Christiansen, Head of ESG at P+ explains: “Our aim is to integrate ESG across as much of the portfolio as possible. That means looking beyond listed equity and considering ESG factors before investing in private equity funds, credit funds and so on.” Integration is more expensive and challenging to implement than a simple technique such as exclusion. So why are investors increasingly enthusiastic about it? The answer lies in the benefits it can deliver, which include: • Ensuring that ESG investing is woven into the value- creation process: ESG considerations should not be separated from traditional investment techniques. • Allowing pension funds to take a more nuanced approach than blanket exclusions: funds should use the skill of investment managers and ESG experts to extract value from every sector. 10 | Investing in a sustainable tomorrow. ESG integration in European pensions.