Investors report data concerns for ESG in alternative investments

"It is more difficult to create ESG metrics on [infrastructure, PE and credit] assets, compared with public equities, and a big part of that challenge is the lack of consistent and reliable data," says Tim Manuel, head of responsible investing in the UK at Aon, a professional services firm.

Manuel adds that institutional investors need to understand that monitoring and reporting is more qualitative given the limited data. This creates challenges when comparing managers for ESG-compliant investments in private equity, infrastructure and credit.

ESG is a relatively new topic for pension funds in the UK; they are interested in understanding its impact on them, working out best practice and adapting to the relevant regulation.

Institutional investors need to be prepared to speak to their asset managers, to understand their philosophy and processes, and how this is implemented in their portfolios, says Manuel. However, there are different stages of sophistication among managers when it comes to ESG.

Manuel says some managers now have dedicated teams for responsible investing, and they are able to discuss ESG topics and themes eloquently. However, he believes some managers are struggling to provide sufficient (or any) evidence to show how their investment decision-making process is impacted by their responsible policies and principles. 

Both Defined-Benefit (DB) and Defined-Contribution (DC) pension plans are showing an increased appetite for ESG investments. However, Manuel says there are different approaches: DC pensions are tending to focus on the environmental aspect; while some schemes are looking at incorporating impact or sustainability funds into their default options. Schemes are using this theme to encourage their younger members to get more engaged in the pension fund, given the increased interest in the environmental scope of their investments.

Aon published an institutional investors survey in June, in which it found climate change was a top concern for investors in the UK (80%) and EU/Continental Europe (76%). More than 220 institutional investors have responded to the survey across the globe, including endowments, foundations, public and corporate pensions and defined benefit plans.

The survey also found 68% of respondents consider responsible investment (RI) to be important to their organisation. However, the attitudes vary by region with Europe leading the charge. Only 30% of US investors have established an RI policy, while 47% of the Europe-based investors have set up such a policy. 

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