A new report shows that 69% of Irish pension funds are taking environment, social and governance (ESG) issues into account to inform investment decisions.
But Mercer's latest European Asset Allocation insights report shows that Irish pension schemes' focus on ESG was less than the European average, with 76% taking ESG issues into consideration.
This rose to over 80% in several markets including the UK (84%), Germany (88%) and Spain (92%).
Mercer noted that in prioritising the relative importance of ESG issues, Ireland was the only country where investors did not rank environmental as the most important ESG component, ranking it second behind governance issues.
Mercer's research covers 12 European markets where, in the past year, an extra €233 billion was allocated to sustainable funds.
The report also showed a continued reduction in the allocation to equities and alternative investments in Irish defined benefit pension schemes.
23% of assets were allocated to equities this year, compared to 27% in 2020.
Bonds have been the beneficiaries with the allocation rising to 58% from 50% last year, as investors seek to protect against volatility and act on concerns related to high valuations in equity markets.
Rob Meaney, Responsible Investment Lead for Mercer Ireland, said that while the Covid pandemic was a very challenging period for many investors, it also saw a large increase in assets moving into sustainable funds across Europe.
"The pandemic has caused a lot of investors to wake up to how the elements of ESG are connected. Although environmental issues continue to remain a key focus, social issues such as human rights and social equity are now much higher up on the agenda, in part due to the impacts of the pandemic," Mr Meaney said.
He said Mercer's research showed that a large majority of European investors integrate ESG into all aspects of their operations including: investment manager selection (83%), investment manager monitoring (88%), reporting (79%) and asset allocation (64%).
"Mercer's survey also indicated that investors are moving from a more reactive position to a proactive one, with regulatory drivers decreasing in significance as a motivator for considering ESG risks. 67% cited this as a key driver, down from 85% last year," he added.
Olivier Santamaria, Head of Investments for Mercer Ireland, said the two biggest concerns for investors this year were Covid-19 remaining an obstacle for for full reopenings and a potential equity market correction.
"With equity valuations at record highs, Irish investors continued to seek diversification and derisk, with a higher allocation to bonds and cash," he said.
"For Irish defined contribution schemes, investors are more heavily weighted towards equity as they look to the higher returns equities can offer over the longer term to build up their pension savings," he added.