What do Brazilian pension funds think about ESG? – 15/09/2021 – Rodrigo Tavares

In the jungle, when the lion roars, the fauna opens its senses. In the Brazilian financial market, when pension funds speak, asset managers also listen. There are almost 300 closed private pension entities that hold assets of R$ 1 trillion that irrigate the fund management market like a waterfall.

Last week, pension funds talked about sustainability. In an unprecedented way, the National Superintendence of Complementary Pension (Previc), the body that ensures the proper functioning of these entities, presented its first mapping of the capacity and interest of pension funds in sustainable finance.

Unquestionably, these entities can be protagonists in boosting the ESG agenda “due to the volume of resources managed, the long-term nature of their liabilities —which allows for more mature applications— and the diversity of financial products that can be part of their portfolios”, said Fernando Folle, Previc’s Investment Guidance General Coordinator, in an interview with the column.

According to the study, 56% of Brazilian pension funds already use ESG factors. Of these, 40% systematically integrate ESG factors and 81% do so to help manage investment risks.

These are very expressive numbers. Exaggerated perhaps? Folle doesn’t think so. Given the role of systematic monitoring that Previc performs for pension fund activities “through a system of indicators obtained from accounting, actuarial and investment information”, the answers must express reality.

One of the conclusions that draws the most attention in the study is the fact that 73% of pension funds that are already part of ESG claim that the sustainability investment options in the market are not enough. In practice, there are almost 200 products in the Brazilian market that use the nomenclature “ESG”, “impact”, “green” or similar. Not a satisfactory volume? Or does the market not trust existing products?

According to Folle, “the answers presented in the survey suggest that the information regime currently seems to be one of the main obstacles to ESG investment, as well as the lack of standardization of reports and metrics for evaluation creates uncertainty in the identification of which products can be considered ESG. (…) As the demand for ESG products increases, it is expected that managers will be able to better identify which assets really have ESG characteristics and increase product launches”.

In other words, the ESG market in Brazil has few traffic signs. Many portfolio companies are not equipped to report their sustainability work in a consistent, dense and comparable way. Many asset managers are unable to collect and integrate this data into investment strategies. In addition, the products under its management adopt disparate terminology and follow poorly standardized practices. It’s a teenager’s bedroom.

Several entities, such as Febraban, B3, Amec, Abrapp and ABVCAP have released guides on the market to inspire behavioral changes. But we need to move from guidance to oversight, with regulators and representatives of financial institutions having to take on more responsibilities in the field of oversight.

Another obstacle highlighted in the study is the need to foster a culture of sustainability among benefit plan participants, who are the owners of the guaranteeing resources invested by pension funds. Only 10% of pension funds invest according to an ESG logic by demand of participants.

Education is essential. It’s been commonplace at least since Egyptian pharaoh Mentuhotep II created the first schools 4,000 years ago (yes, I Googled it). But the educational offer in ESG in Brazil is still scarce, with the exception of short-term executive courses. It is still possible to graduate in economics or finance from a good Brazilian university without the student having taken classes on how sustainability impacts risks and opportunities.

And what does Previc think about the need to adopt new laws to force pension funds to prioritize ESG?

This will not be the way forward: “the current regulatory framework is sufficient to promote and induce the use of ESG criteria in pension fund decision-making”, says the autarchy. The Brazilian regulation “is in line with the guidelines issued by the International Organization of Pension Supervisors (IOPS)”, an international organization of the OECD (Organization for Economic Cooperation and Development) which includes the participation of Previc and where the study was also presented.

Folle concludes: “the gradual increase in allocation in ASG products depends on the development of the product offer by the market, on the improvement of the informational regime (lack of information and lack of standardization), and on the promotion of the ESG culture among participants of the benefit plans.”

This was also the conclusion of an event organized last week by the Brazilian chapter of the Principles for Responsible Investment (PRI), in which, in addition to Previc, Brazilian, Mexican and Portuguese pension funds and asset managers participated.

It is also the conclusion of several experts who pour their opinion into the wide coverage that the Brazilian press has given to sustainable finance.

The problem is diagnosed. The rest remains to be done.

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