Avoiding reputational risk drives pension funds to adopt environmental, social and corporate governance (ESG) “principles” more so than it does other types of institutional investors, a survey suggests.

More than one-third (35%) of pension fund respondents to the survey – carried out by State Street Global Advisors (SSGA) earlier this year – included reputational risk as a top three factor driving ESG investing at their institution, compared with 21% of endowment and foundation respondents, and 6% of sovereign wealth funds.

“Reputational risk is of greater concern for pension funds, particularly public pension funds, because any public criticism of their portfolio allocation decisions often leads to additional scrutiny by their beneficiaries,” Rakhi Kumar, head of ESG investment strategy at SSGA, told IPE. “This could result in increased regulation or interference in the investment decision making process.”

Meeting or anticipating regulation was the most significant driver of pension funds’ adoption of ESG principles, however, the survey showed, followed by mitigating ESG risks, and fiduciary duty.

Across all types of institutions, in Europe, regulatory shifts were the clear top “push factor” (52%), said SSGA, followed by a desire to mitigate ESG and reputational risks (45% and 39%, respectively). In North America, regulation was the third most significant driver.

This is arguably no surprise given developments such as the European Commission’s sustainable finance action plan in Europe, while the US, according to the Principles for Responsible Investment (PRI), is an exception to the growth in sustainable finance policy measures since 2000.

Across all regions, outperformance emerged as a less significant ESG adoption driver than risk mitigation.

Almost half of the surveyed investors (48%) felt their ESG/responsible investing strategy had a positive impact on the “ESG behaviour” of their investee companies or reduced ESG risks to their portfolio (47%).

For respondents who noted fiduciary duty as their primary consideration, the next and highest ranked drivers – both at 40% – were requirements for ethical and social responsibility on behalf of their clients and a desire to mitigate ESG-related risks.

Hurdles: data, resource constraints

The survey, which was of senior executives directly involved in or influencing asset allocation decisions, also sought to delve into factors holding back ESG adoption.

The chief deterrent selected by respondents across all investor types was unreliability and inconsistency of ESG data, although internal resource constraints/cost implications were a close second (44% and 43%, respectively).

Pension funds were most concerned with a lack of reliable or consistent ESG research/data, according to the survey, while sovereign wealth funds and endowments and foundations cited internal resource constraints and cost implications as the top factor hindering increased uptake of ESG.

A lack of expertise to integrate ESG factors appears to be problematic for pension funds in particular, with 45% citing this as a top three barrier compared with 21% of endowments and foundations, and 38% of sovereign wealth funds.

SSGA surveyed senior executives with asset allocation responsibilities at more than 300 institutions, comprising private and public pension funds (78%), endowments (6%), foundations (11%) and sovereign wealth funds (5%).

A spokesman for SSGA said that where the firm referred to ESG or responsible investing in the survey, it was describing “a deliberate investment approach that aims to incorporate environmental, social and governance (ESG) factors into investment decisions”. By a policy on ESG or responsible investment the company meant a formal code or set of guidelines adopted by a respondent’s institution that sets out its approach to responsible investing, including the objectives and scope of its responsible investment strategy.

The SSGA survey report can be found here.

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