Cerulli Associates cautioned advisors against using environmental, social and governance investing strategies in pension funds in its global edition of the December Cerulli Edge. Even so, the firm acknowledged that the trend is likely to continue.

The report pointed to Volkswagen’s emissions scandal as a potential catalyst to accelerate the trend. “Pension fund shareholders of Volkswagen rightly feel aggrieved; not only over the loss to their portfolio valuations, but also because of the health and environmental damage inflicted on society at large,” according to the report.

Overall, ESG and socially responsible investing has grown beyond managers passively excluding certain industries, such as weapons or tobacco, from funds to taking a more active approach to corporate responsibility. Cerulli found the world’s 500 largest companies spend more than $15 billion per year on corporate social responsibility activities. “It has become big business in itself and an employment bandwagon,” according to the report.

Furthermore, Cerulli noted that the United Nations’ Principles for Responsible Investment (UNPRI) initiative has grown from 100 asset owners, investment managers and professional services partners representing about $4 trillion 10 years ago, to 1,260 signatories with a collective $45 trillion in AUM. Some of those signatories include CalPERS and the Harvard University Endowment, and BlackRock, JPMorgan and PIMCO.

Cerulli referred to research from Boston Common Asset Management that found good corporate governance pays off for firms by way of better operational efficiency and “good will” among investors through diversity of hiring, human rights policies and environmental considerations.

However, pension funds can’t forget their obligations to participants.

“The possible legal implications of looking beyond pure financial returns when making investment decisions need to be weighed up,” Barbara Wall, Europe research director at Cerulli Associates, said in a statement.

It may be that losses aren’t as bad as the extent of those losses. Cerulli referred to a court case where “church commissioners had acted within the law by deciding that excluding 13% of the market would be acceptable, while excluding 37% would not be.’”

Acceptance of responsible investing varies around the world, Cerulli found. A 2015 survey by the CFA Institute polled more than 44,000 portfolio managers and research analysts and found the Asia-Pacific region was most likely to consider corporate responsibility in investment decisions, followed by Europe, the Middle East and Africa. Those in the Americas were least likely to use ESG in investment decisions.

Carbon-induced climate change is the most “visible and controversial” issue for ESG strategies, Cerulli said. An investor lobby group called Preventable Surprises argued that pension funds have a responsibility to address climate change because it poses a “significant and increasing risk” to the global economy and thus investors’ portfolios, and institutional investors have a fiduciary duty to protect pension beneficiaries as much as they can.

Widespread adoption of that attitude could have a “dramatic” effect on the economy, Cerulli found. To keep the global temperature increase below 2 degrees Celsius, as suggested by the Intergovernmental Panel on Climate Change, would require keeping 82% of coal and 49% of known gas reserves in the ground, according to research from the Carbon Tracker and University College London.

“These ‘stranded’ assets would have an enormous price impact on energy companies the Dow Jones U.S. Coal index lost more than 92% of its value between March 2011 and August 2015. Could this be what lies in store for the oil companies?” Cerulli asked.

“We expect more pension funds to start considering ESG investing, but cultural backgrounds and the level of investor sophistication will be factors in determining any commitment,” Justina Deveikyte, an international analyst at Cerulli, said in a statement. “For example, pension funds in the Netherlands and Denmark will be far more inclined to do so than, say, those in Germany.”

— Read Impact Investing Returns as Good as S&P 500: Wharton on ThinkAdvisor.