Southern Europe signing up to the PRI: a process likely to move quickly

The further south in Europe, the less interest has historically been paid to sustainability in investment. This is now changing, and the rate of change is accelerating. Inarcassa, the €10bn pension fund for self-employed engineers and architects, has just become a signatory to the UN-backed Principles for Responsible Investment, the first of Italy’s first pillar pension funds to do so.

Two years ago, nobody spoke of these matters,” says Alfredo Granata, chief investment officer at Inarcassa.

From speaking to colleagues from other pension funds, I believe that in the next 3-6 months, we will see several more signing up.” So far, just four second pillar pension funds have signed up.

The PRI process has taken a year from the first decision by the board of directors to work towards it. It was driven by two factors, says Mr Granata.

“The first reason is reputational among members,” he explains. “The second is that since we are a very long term investor, we realised that in the long term, this kind of analysis could assure us higher returns.”

Although critics sometimes suggest that PRI membership is a tick-box exercise, that is definitely not how Inarcassa is approaching it.

The Italian pension fund has been working with the secretariat of the PRI to understand what it is signing up to, what responsibilities that brings, what guidance there is on completing the transition of its portfolio from traditional to sustainable and how it should manage its investments in the future.

By the end of this year, the board of directors will have started the selection framework for an outside contractor to examine the portfolio, see where it needs to change to become more compliant with the PRI and to manage the process of change.

That process, which is expected to take two to three years, will affect the entire portfolio. Investments in ESG-linked instruments such as an ESG ETF and green bonds are already in place, but there remains much to be done.

Building up ESG investment process

For the 60-65 per cent of the AUM where the investment management is outsourced, managers will be rated on their ESG performance as well as their investment proposition.

For the remaining portion of the portfolio that is directly invested, mostly in domestic equity and fixed income, the plan is to integrate analysis of ESG risks into the investment process. “For example, we will look at how much pollution we can avoid,” says Mr Granata.

Because sustainable investment is a new concept within Inarcassa, part of the purpose of the implementation process will be to build expertise inhouse. Already recruitment has started to expand the investment team with this in mind, while the contractor providing oversight on the transition to an ESG-compliant portfolio will also be tasked with ensuring the team is ready to take on that responsibility in the future.

The broader financial and market environment provides an additional motivation for Inarcassa’s decision, explains Mr Granata. “From now on, it will be harder and harder to make returns. In this environment, anything that can help make our investments more effective will be welcome.”

The regulatory

The regulatory environment is very different in Italy from in France or the Nordic countries, with little or no encouragement to pension funds to take ESG issues into consideration. Mr Granata expects this situation to change slowly as investors and asset owners start to see the advantages of sustainable investments.

The more the ESG consciousness will be applied, the more the regulation will follow on.

Mr Granata is not worried by this dilatory approach to the issue from the regulator. “I hope always any process could be developed without being forced by regulation. In general, it would be more effective” without being imposed by regulation.

If Inarcassa is the first of a wave of pension funds signing up to the PRI, as he expects, that process development is likely to move quickly.