Impact investing is now viewed among the key pillars of sustainable investing, alongside integration and positive screening, Schroders Institutional Investor Study 2022 has found. Schroders flagship annual institutional study, first launched in 2017, is an influential bellwether of the investment appetite of investors globally, spanning 770 investors and US$27.5-trillion in assets.
Just under half (48%) of investors said impact investing was their preferred approach to implementing sustainability, a significant increase on 38% a year ago and 34% in 2020. The Study also found that the importance of full ESG integration into the investment process had grown as a focus, further cementing it as the most favoured approach among investors.
Q. What is your preferred approach to implementing sustainable investments?
Growing demand for investment solutions focused on the energy transition was also reflected by the findings. Well over half of investors (59%) said that new investment opportunities addressing the energy transition would encourage them to invest more into sustainable investments. This focus was particularly strong in the UK and Asia Pacific where 68% and 62% of investors respectively highlighted the need for more transition-oriented solutions.
Q. What would encourage you to invest more in sustainable investments?
Interestingly, although the South African sample was small, nine out of 10 respondents said that they believe more consensus around frameworks and methodology would help the journey to net zero.
At the same time, performance concerns over investing sustainably have ticked up over the past 12 months, with 53% of investors citing this as a challenge compared with 38% a year ago. This is a significant reversal with worries about performance having consistently fallen year-on-year until now, and likely reflects the more challenged market environment. Specifically, in South Africa, eight out of 10 respondents cited performance as a concern. A lack of transparency and reported data was also recognised globally as one of the major obstacles holding investors back from investing sustainably.
Engagement remains a key focus for investors globally with 59% stating that tangible evidence of real world outcomes was the most important component of any active ownership strategy. Specifically, almost two-thirds of investors (64%) believed governance (e.g. transparency of voting and shareholder resolutions) was the top engagement theme. A focus on human rights and the climate completed the top three in terms of engagement priorities.
Encouragingly, almost four in ten investors globally said they had committed to reaching net zero by 2050, with European investors leading the field on this point, ahead of those in Latin America, Asia Pacific and North America. One-third of North American investors are still exploring the transition but are not yet committed to specific targets. Locally, concerns around the practical implications of a just transition are evident with seven out of 10 respondents stating that they are committed to reducing emissions but not to net zero.
Q. Where are you on your path to net zero?
“The findings of today’s influential Study are striking; more and more institutional investors want to measure, manage and deliver impact. Recognising concerns over tensions between sustainable investment and return goals, it’s becoming clear that thoughtful approaches grounded in investment experience will be increasingly critical,” says Andy Howard, Schroders Global Head of Sustainable Investment.
“The Study shows that this focus on impact is increasingly important and Schroders is committing significant time, resource and expertise to developing robust and rigorous solutions to meet that need. This focus also extends to offering solutions designed to support the energy transition among a spectrum of social and environmental goals, which is strikingly now one of the key priorities for investors going forward.
“The Study’s overarching focus on delivering real investment outcomes for investors was further evidenced by the importance placed on engagement. Schroders’ market-leading Engagement Blueprint, published this year, is setting new standards on active ownership as it maps out our ambitions and how we look to engage with companies to support and drive progress.”
More broadly, investors’ return expectations for the next five years have deteriorated compared with a year ago, compounded by significant concerns over the impact of rising inflation and interest rates, as well as geopolitical uncertainty growing and fears over a global slowdown.
Q. Which one worries you the most?
Amid a more challenged outlook, the Study did however find that investors’ confidence in achieving their returns has remained steady – most likely the result of their scaled back expectations.
Interestingly, concerns over global pandemics have markedly fallen in importance as an issue for investors compared with the previous two years.
“Markets continue to be caught in the cross currents of concerns about rate increases and worries about recessionary risks. The Study found that investors’ allocations to equities have dipped, reflecting our own house positioning. Indeed, determining what other positions to own around that core defensive position in equities requires a view on whether rates or growth risks are most important,” comments Johanna Kyrklund, Schroders Group Chief Investment Officer and Co-Head of Investment.
“More broadly, in terms of the impact on portfolio performance, the Study found that a number of issues are increasingly on the radar of investors: rising inflation and interest rates, hawkish monetary policy stances, global conflicts and the looming threat of a global economic slowdown. These are all factors that Schroders as an active manager is also looking to navigate on behalf of its clients globally.
“Our conclusion is to continue to focus predominantly on the consequences of rising rates because traditional inflation models are vulnerable to supply bottlenecks caused by a myriad of unprecedented sources; post-pandemic spending patterns, lockdowns in China and the war between Russia and Ukraine. This leaves central banks focused on normalising policy above all else.”
Schroders commissioned CoreData to conduct the sixth Institutional Investor Study to analyse the world’s largest investors’ key areas of focus and concern including the macroeconomic and geopolitical climate, return expectations, asset allocation and attitudes to sustainable investing and private assets.
The respondents (770 globally) represent a spectrum of institutions including corporate and public pension plans, insurance companies, official institutions, endowments and foundations, collectively responsible for US$27.5 trillion in assets. The research was carried out via an extensive global survey during March 2022.