Thematic investments in focus as investors seek to harness sustainability trends

In this year’s Institutional Investor Study, we see that North American institutional investors are increasingly focused on thematic exposures and the impact of their investments. As investors become more comfortable with sustainability as an investment discipline, we are seeing demand mature from seeking more general integration of sustainability characteristics to more specific approaches that directly benefit from long-term global economic themes. 

As the world grapples with regime shift and the trends of deglobalization, decarbonization and demographics on the investment landscape, sustainability themes are becoming increasingly important, creating new opportunities for companies and investments that provide sustainable products and services. As a result, investors are looking to identify and allocate capital to these emerging sustainable investment themes. 

Thematic approaches to sustainability  

With decarbonization perceived as an enduring trend, driven by policy and regulation, as well as increased corporate commitments, institutional investors are seeking to tap directly into market tailwinds for companies that are leaders in or enablers of transition. In other words, there is a shift from simply considering ESG as a risk mitigation tool, to identifying and targeting thematic sustainability opportunities arising from macroeconomic shifts.  

When asked for their preferred approach to investing sustainably, this year’s US respondents highlighted thematic (69% vs. 61% global) as their top choice while Canadian investors highlighted exclusion (61%) and thematic (60%) as their preferred approaches. Thematic investing can be seen as a running trend throughout the results: for example, when asked about the most important themes within natural capital and biodiversity, sustainable food and water was most selected by US (45%) & Canadian (36%) investors (34% global), while Canadian investors also highlighted the circular economy (34%).  

Q: What is your preferred approach to investing sustainably? Rank up to three. 

^{Source: Institutional Investor Study 2023, Notes:  Respondents ranked approaches from 1–6. This graph shows %Rank 1+2+3. 'Other' response not shown. Global = 1%, Canada = 7%, United States, 3%.} 

Fiduciary duty & financial returns key driver for sustainable investing  

This year’s results have highlighted that North American investors do want their investments to make a positive impact on society and the planet (42%). While this may not necessarily mean impact investing in the traditional sense of having an additional impact objective alongside a return objective, it does mean that investors understand that investments can cause externalities to people and planet, and they want to quantify and account for those impacts. Beyond this, we can observe stark differences between other motivations among investors in Canada and the US. Regulatory and industry pressures (46%) is cited as the key driver for Canadian investors’ sustainability focus, followed by aligning to corporate values (37%), whereas in the US, fiduciary duty is highlighted as a key focus of sustainability, though it is perceived as somewhat less important in other regions (37% vs. 30% global).  

Q: What is driving your sustainable investment focus?

^{Source: Institutional Investor Study 2023, Note: Respondents were asked to select all that apply. 'Other' response not shown. North America = 2%, Canada = 8%, United States = 15%.} 

When investors are selecting an impact investment, 60% of North American investors say that the most important criteria is an impact which is easily measured and understood, followed by an impact that could be of benefit to their stakeholders (58% vs. 53% globally).  

In a similar vein, 70% of North American respondents value sustainability and impact (S&I) strategies for their long-term financial returns (74% in US, 64% in Canada). Endowments and Foundations are most likely to believe that sustainable and impact strategies will achieve long-term financial returns (41%); the majority of this segment in this year’s Study were based in North America.  

As has been noted above, we have seen an increased investor desire to invest thematically; in fact, North American investors (67%) highlighted that another key driver for investing in S&I is to invest in new sectors such as green hydrogen, nature-based solutions, etc. While global investors overall are also interested in these new thematic opportunities (62%), they are also equally motivated by the belief that sustainable investing is linked to good long-term returns (64%) and by a desire for regulatory alignment (60%).  
Q: Why would you invest in sustainability and impact strategies? Rank top 3. 

^{Source: Institutional Investor Study 2023, Note: Respondents were asked to rank their top three answers. Rank 1+2+3. 'Other' response not shown. Global = 2%, Canada = 8%, United States = 3%.} 

Active Ownership  

Investors’ perspectives on active ownership are becoming increasingly focused on how engagement can lead to tangible real-world outcomes that could potentially drive better financial performance.  

When it comes to the issues that investors see as most important for them in terms of active ownership, corporate governance was the top theme for all regions. For North American investors, human capital management (53%) and human rights (53%) follow suit, with Canadian investors ranking human rights as second most important (58%). We believe that in the context of the Covid pandemic followed by inflationary and cost of living challenges, in the absence of the social safety net that exists in other parts of the world, and in the fraught political climate of recent years, US investors keenly feel the issues around financial inequalities, social and racial disparities, and the challenges faced by workers. See more on this topic on our Human Capital Management Research in collaboration with Saïd Business School, University of Oxford, and the California Public Employees’ Retirement System (CalPERS). 

Issues around economic inclusion (education and training, quality work, living wages, gender equality, workforce diversity), sustainable infrastructure, and good health and well-being (access to healthcare) are therefore meaningful to a majority of US investors. US investors also placed higher emphasis on diversity & inclusion (42%) vs. Canadian investors (27%).  

As with impact investing, investors want engagement strategies that have tangible evidence and measurement; 56% of global investors said that one of the most important features of an engagement strategy to them is evidence of real world outcomes with a measurable improvement for their stakeholders. This is even higher for US investors at 65%. For Canadian investors, the top priority is evidence of improved financial performance from an engagement strategy (52% vs. 44% global). 

In summary  

In summary, investors appear to be ready to harness the principles of sustainable investing more directly towards building more resilient portfolios. Schroders is therefore focused on delivering a range of ESG options, including innovative thematic and impact solutions, to clients, and we have also continued our robust active ownership agenda. Finally, we believe that regulation in the US will further solidify in the next year, requiring increased ESG disclosure, which will allow for better assessment of companies and more informed investment decisions.