An increasing percentage of European pension funds are now taking climate-change risk into account when it comes to investment allocations, with awareness of ESG-related risks also on the rise.

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Consultant Mercer’s latest European asset allocation insights survey found that 54% of respondents actively consider the impact of climate change-related risks on their investments, up from 14% in a 2019 survey.

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Further, 89% of pension funds now consider wider environmental, social and governance risks as part of their investment decisions, up from 55% last year. While regulation remained a concern for investors when it comes to ESG-related risk, the proportion worried about the potential impact on investment returns grew to 51% from 29% last year.

A desire to mitigate potential reputational damage was cited as a reason to consider ESG risks by 40% of respondents, and 30% want to align their investment decisions with their sponsoring company’s existing corporate responsibility strategies, a report of the survey results said. Mercer surveyed 927 institutional investor clients with total assets of about €1.1 trillion ($1.3 trillion).

Respondents were surveyed in the fourth quarter and early in the first quarter. Other findings included a continued move away from equities, with an average equity holding of 22% vs. 25% last year. Fixed-income allocations grew 10 percentage points to 47% in the 2020 survey, while real assets allocations grew to 4 percentage points to 53%.

Private equity allocations also grew, to 14% from 8% in the 2019 survey. While European pension funds are moving away from equities in general, those sticking with the asset class are diversifying within allocations. Exposure to emerging markets increased to 43% from 34%, small-cap equity allocations grew to 21% from 12% and investment in low-volatility equities increased to 17% from 7% in 2019’s survey.

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