Investment consultants around the globe are asking their pension fund clients to think carefully about two very real concerns that have emerged in passive investing: ESG-related and concentration risks.

Some pension fund clients have heeded their advice, reconsidering whether they should be implementing some kind of ESG tilt to their benchmarks and in other cases, looking to take portions of the allocation to an active manager instead.

“We are … having exactly these conversations: How much of this risk are people even aware of (that) is under the bonnet of their passive portfolio?” said Andrew Peach, head of factor investing at Aon PLC in St. Albans, England.

Willis Towers Watson PLC also thinks it’s time for passive investors to rethink whether they might want to go active or move to an index “that doesn’t suffer quite so much” from concentration, and environmental, social and governance issues, said Craig Baker, global chief investment officer in London, on a Feb. 9 virtual investment briefing.

Executives at the £6.8 billion ($9.4 billion) Nationwide Pension Fund, Swindon, England, are looking to take action on ESG concerns. They’re set to submit a proposal to trustees this month, proposing to move 25% of the pension fund’s passively managed equities portfolio into a passive ESG index. If approved, the transition would begin in April. “The reason we’ll transition only in part (at first) is we recognize there are a lot of different ESG indices in the market and a lot are quite nascent and being developed. So let’s move part to something that’s up and running — it’ll probably still have some exposure to things like oil and gas, but lower exposure, and then we’ll spend the next 12 to 18 months researching in detail the other indices that take a much more active approach, see how they have developed and (we will) have a better understanding,” said Mark Hedges, CIO at the pension fund.

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