Schroders Institutional Investor Study 2023: APAC investors target sustainability and private assets amid energy transition opportunities as inflation concerns remain
- More than half of APAC respondents worry about the impact of geopolitical uncertainty and inflation, leading them to invest in companies with more localised supply chains, both in public and private markets.
- In the next two years, 35% of respondents expect to increase allocations to private assets, as two-thirds of respondents believe the asset class will offer the best opportunities to get involved in key trends such as the energy transition or impact investing, in addition to being a deeper source of diversification.
- Around half of APAC investors believe that infrastructure/renewables are best placed to capture energy transition investment opportunities in the medium term, leading them to plan to increase allocations to these asset classes.
- The majority of investors believe sustainability and impact strategies will support their objective of achieving long-term financial returns, however, institutional investors require more support from their external managers to help navigate their sustainability and impact investing objectives, particularly regarding the measurement of impact.
Allocations set to shift as concerns over inflation and geopolitics remain
Investors in Asia Pacific aim to harness the investment opportunities provided by the energy transition as they increasingly expand into private assets, Schroders’ flagship Institutional Investor Study has found.
The annual study, which spans 770 investors across 36 regions and US$34.7 trillion in assets (including 195 investors from the Asia Pacific region), is a strong barometer of the investment appetite of investors across the globe.
It has identified that inflation and geopolitical uncertainty remain acute concerns for investors despite expectations a year ago that they would subside. Results show that, over the next 12 months, more than half of investors expect geopolitical uncertainty and rising inflation to have the greatest impact on portfolio performance.
This is unsurprising, with decarbonisation, changing demographics and deglobalisation all having the potential to keep inflation high1. Furthermore, these macro themes are also driving investors to change their portfolio allocations.
For example, in response to the growing deglobalisation trend, over half of the APAC respondents believe that investors will look towards investing in companies with more localised supply chains, with developed market equities (35%) and private equity (28%) believed to present the best opportunities over the coming years.
Additionally, the majority of APAC respondents (82%) believe that one of the main benefits investing in private assets delivers is a deeper source of diversification over the next two years, which is one of the reasons why a third of APAC respondents are considering increasing their allocations to these asset classes over the next two years.
Accessing investment opportunities in the energy transition
This year’s study has found that investors believe the transition to net zero offers significant opportunities. More than two-thirds (69%) of APAC respondents think it is likely or highly likely that the energy transition will spur investment in innovation, creating significant investment opportunities.
Around half of APAC investors believe that infrastructure/renewables are best placed to capture the investment opportunities presented by decarbonisation trends in the medium term. With the asset classes poised to benefit from the green technology revolution, 46% of APAC respondents noted that they expect to increase allocations to infrastructure over the next 12 months.
More broadly, 58% of APAC respondents are seeking to proactively harness the investment opportunities presented by the energy transition and related technological revolution through a greater exposure to private assets. Similarly, when asked why they would consider investing in sustainability and impact strategies, 71% of APAC respondents expressed an appetite for investing in new sectors, such as nature-based solutions and green hydrogen, to achieve portfolio diversification and expand into new themes and asset classes. Such a proportion is significantly higher than their global peers by 9%.
Key approaches to sustainable investing
Investors may adopt a variety of approaches to sustainable investment, reflecting their values and investment objectives and the field is filled with different interpretations of common terms. In our study, institutional investors noted they are increasingly looking to invest thematically and enhance their impact investment focus.
What’s more, the majority of investors believe sustainability and impact strategies will support their objective of achieving long-term financial returns (e.g. this is simply good business), with 35% of APAC investors highlighting having a positive impact on people and planet as one of the top drivers for sustainable investing.
APAC investors identified infrastructure (35% vs 44% globally) and natural capital & biodiversity (49% vs 41% globally) as the best-suited asset classes within private assets to deliver their sustainability and impact objectives now, with this focus growing as their investment timeframe extends.
However, today’s study demonstrates that support is needed to help investors with impact investing, with measurement being a key challenge. Close to three-fifths of APAC investors (58%) believe having an impact which is easily measured and understood to be the most important criteria when considering an allocation to impact-focused investments. Furthermore, over half of respondents identified a lack of standardisation in terms of measurement, process, tools and metrics, among others, to be the biggest obstacle for investing in private assets strategies focused on sustainable investing.
Greater support needed to reach net zero targets
Whilst half of global respondents have already made commitments to reaching net zero across their portfolios, close to a quarter of APAC respondents (24%) stated that they have no intentions of doing so. Specifically, EMEA-based investors were the most committed to delivering net zero by or before 2050 and are implementing a strategy with interim targets (39%), whilst the majority of respondents with no commitment were based in the US (39%).
Across all markets, it is felt that more support is needed in measuring and tracking net zero pathways. About half of global respondents think their organisation mostly needs support in measuring and tracking their net zero path, up to 51% from 37% last year. Meanwhile, results showed that 58% of APAC investors believe that a greater consensus is also required around the respective frameworks and methodologies which measure net zero pathways in order for them to achieve their commitments. This compares to 49% of investors globally.
Johanna Kyrklund Group Chief Investment Officer and Co-Head of Investment, Schroders, commented:
“Markets continue to be caught in the cross-currents of concerns about rate increases and worries about recessionary risks. The Study found that institutional investors’ allocations to equities may increase as they look to capitalise on the opportunities presented by deglobalisation, decarbonisation and demographic trends. With concerns about high inflation and high interest rates, valuations matter. A renewed focus on valuations rather than speculative growth may be required.”
“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, hawkish monetary policy stances, global conflicts and stagflation. These are all factors that Schroders, as an active manager, is also looking to navigate on behalf of its clients globally. We believe it’s time to be discerning, analytical and valuation-focused once again.”
Mervyn Tang, Head of Sustainability APAC, Schroders, commented:
“We are starting to see new emerging trends in the seventh edition of the Schroders Institutional Investor Study as investors continue to grow and evolve their approach to sustainability. APAC institutional investors are expecting climate policies to accelerate, even more so than investors in other regions; 59% thought it was likely for a shift in climate legislation to turn climate politics into concrete actions, compared to 51% globally. This is driving how they think about their portfolios in identifying and allocating capital with the same percentage thought it was likely that climate change will prompt investors to consider more sustainable and impact strategies, such as portfolio decarbonisation.”
“As the world grapples with this new regime shift and the trends of deglobalisation, decarbonisation and demographics impacting the investment landscape, we will continue to review the priorities and expectations of our clients and market best practices to accelerate positive change.”
Nils Rode, Chief Investment Officer, Schroders Capital, commented:
“This year’s study shows that investors have grown less certain. Confidence levels have taken a knock from unstable, unpredictable geopolitics and the delicate task facing central banks of cooling inflation without unwanted side effects. We think investors are right to exercise caution but should also view this disruptive environment not as merely a temporary phase but as the emergence of a new era altogether. What is clear from the study results is that many investors continue to be drawn to private assets as a means to engage with the evolving macroeconomic landscape, as well as to add resilience to portfolios.”
“Private equity, private lending and real assets – both infrastructure and real estate – were the areas investors said they were most likely to add to in the coming year and beyond. Thematically, investors are aware that private assets are plugged directly into durable trends of disruption and progress that will be catalysed by rapid improvements in AI tech, the ongoing energy transition and decarbonisation, as well as demographic change. The report also highlights investor engagement with deglobalisation trends that - supportive of companies with localised supply chains – also reinforce private asset allocations.”
“We believe the above trends are central to identifying opportunities for value creation in the new environment. We are prioritising strategies aligned with these themes, with low correlation to stock markets, limited or no dependence on leverage and multiple avenues for exit. Demand ’hotspots‘ have emerged in places where too much capital is chasing too few deals and inflated entry multiples. There are many opportunities to deploy capital at more attractive levels. In the case of debt, the retrenchment of banks has seen the demand dynamics shift in favour of private lenders who can set preferential terms and secure strong returns.”
1 The Big Questions: What is the 3D reset? (Schroders)
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