The UK is the 'leading European market' for environmental, social and governance (ESG)-related investments, with £6,439bn assets under management, according to joint research by Association of Luxembourg Fund Industry (ALFI) and PwC Luxembourg.

The joint report, Beyond their Borders: Evolution of foreign investments by pension funds, stipulated that European managers were taking the lead in applying ESG criteria to investments, with them expecting to observe 9.3 per cent growth from 2017 to 2025.

The UK meanwhile is expected to see growth of around 10.5 per cent during this eight-year period, which the report stated "reflects the increasing importance of ESG amongst asset managers”.

Predicting an increasing pressure on pension funds to provide evidence of effective ESG investment, the report also highlighted that growth in the ETF market could be a “future driver” for sustainable finance.

The report highlighted the impact of the IORP II Directive, introduced in 2017, which requires European pension funds to assess climate-related risks, noting that 2018 saw 17 per cent of pension funds consider the investment risk of climate change (compared to 5 per cent in 2017).

Furthermore, the research also pointed out that various EU member states are developing initiatives to “encourage ESG integration”, noting the UK regulations introduced by Department for Work and Pensions in October 2018 and 2019 respectively.

The report stated: “The UK pension industry is under ever-increasing pressure with…ever-increasing policies and regulations and growing demands for better transparency and governance from the policy makers and the regulator.”

The British pension market was also one of the most mature worldwide, with pension assets equivalent to 99 per cent of Britain’s £2.2tn GDP at the year end of 2018.

This ratio of pension assets to GDP is expected to increase further, as pension assets grew at a compound annual growth rate (CAGR) of 5.5 per cent between 2014 and 2018, outpacing GPD growth (CAGR of 4.7 per cent).

While the research also stipulated that the market is “well fragmented”, with the 10 largest pension funds holding 18 per cent of total pension assets, it also highlighted the “pressure to consolidate”.

Recently, the PPF’s latest Purple Book showed the DB universe ‘shrinking’ over the last year.

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