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DWS survey finds passive investment with climate change filters set to increase

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Passive investment with climate-linked filters is set to increase for pension funds according to a DWS-sponsored survey by consultants CREATE-Research. The survey found that two thirds of pension funds (65 per cent) will increase their climate-linked passive investment. 

The study shows climate-linked investment has become embedded in passive asset allocation: 26 per cent of plans said they commit over 15 per cent of their passive funds to the segment. However, just over half (56 per cent) still have no allocation at all as part of their passive investments, and 60 per cent say they are constrained by data and definitional problems.

A full 70 per cent of plans examine capacity and track record to fulfil a ‘green’ agenda when choosing an asset manager for climate-related investments.

“This survey shows how sustainability is moving up the agenda for pension funds globally, and how it is being worked into broader moves to embrace passive investment solutions,” says Simon Klein, Head of Passive Distribution, Europe and Asia-Pacific, at DWS.

Climate-linked passives are taking their place in a growing passive thematic investment field. The survey also found that some 57 per cent expect overall ESG allocations to grow more than 5 per cent per annum over the next three years.

Some 70 per cent treat traditional cap-weighted index funds as their favourite passive vehicle of choice, and 89 per cent treat equities as their favourite underlying asset class.

In terms of ETFs, the survey found that the pension plans’ allocation has seen an increase in 2020 to 10 per cent. The report says: “They are deemed to concentrate on narrow market segments. Also, they are deemed more suitable for short-term investors with high trading activity. On the plus side, they are also seen as the perfect vehicle for executing risk-on/risk-off trade in this prolonged era of volatility.”

Smart beta funds are being favoured by those pension plans who worry that cap-weighted indices invariably become bloated because, by their very nature, they overweight expensive companies to the detriment of inexpensive companies that are not in the indices.

The report found that, in contrast, smart beta seeks to harvest risk premia such as quality, value, low variance and momentum. “By controlling factor exposures, smart beta aims to improve risk-weighted returns. By beating the cap-weighted indices, they also seek to deliver alpha. On the flipside, their periodic rebalancing can drive returns, but it can also be costly and erode returns.”

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