Sustainable investment not core investment consideration for institutional investors
Investing sustainably remains a minor factor in the investment decision-making process despite institutional investors’ expectations it will grow in importance, Schroders Institutional Investor Study 2018* has found.
The study – which surveyed 650 investors encompassing approximately $24 trillion in assets – has identified a mismatch between institutions’ perceptions of the importance of sustainability** and what is still happening at the coalface of their investment process.
Almost a third of investors (32%) said that the sustainability focus of the investment had little to no influence on their investment decision-making, significantly less important than factors such as strategic asset allocation, fund manager track record, anticipated return and risk tolerance.
The study however found that sustainability was a bigger focus for larger institutional investors.
Investors who did place greater emphasis on sustainability tended to have a longer-term investment horizon, more investment confidence and prioritised risk-adjusted returns.
Some 32% of those that had holding periods of at least five years stated that sustainability was a significant influence. This compares to 23% of investors whose investment horizon was between three and five years.
Investors more focused on sustainability were markedly more confident in achieving their return expectations. Well over half (59%) were at least reasonably confident of meeting their expectations, compared to 37% of investors who did not prioritise investing sustainably.
They also focused on generating risk-adjusted returns, with 66% targeting this approach compared to 53% who were less focused on sustainability.
Overall, just under three quarters of investors (74%) globally stated that investing sustainably would grow in importance over the next five years, up on 67% a year ago. A little under half (47%) said they had increased their allocations to investing sustainably over the last five years.
Corporate strategy, climate change and accounting quality were identified as the most important issues investors should engage companies on.
However, over three quarters of investors (77%) admitted they found investing sustainably at least somewhat challenging – the same proportion as last year. Performance concerns were at the forefront of their challenges, with 51% citing this as an obstacle to investing sustainably, up on 44% a year ago.
A lack of transparency and difficulty measuring risk were the other main challenges investors said hindered investing sustainably.
Over a third of investors (34%) globally said that evidence demonstrating that investing sustainably delivers better returns would boost their allocations to investing sustainably. Notably, this rose to just under half (49%) for investors in North America.
Jessica Ground, Global Head of Stewardship, Schroders, said:
“There remains a gulf between institutional investors’ sustainable investment aspirations and the reality of how they prioritise these factors in their investment decision-making.
“Investors clearly recognise that investing sustainably is going to be more and more important going forward, but this approach is yet to sit at the heart of their investment process.
“This study demonstrates that investors who prioritise investing sustainably tend to have longer-term investment horizons and greater confidence about achieving their return targets.
“Empowering investors to think longer-term and avoid making short-term, knee-jerk investment decisions has also been a growing focus of policymakers globally.
“Over time, this study highlights that sustainability is going to increasingly sit alongside institutional investors’ more long-standing investment priorities, although there still remain barriers to overcome to achieve this in the near term.”
Please click here to view the full report.
*This global study was commissioned for a second year by Schroders and undertaken by independent research agency, CoreData Research, studying institutional investors representing a variety of institutions, including pension funds, foundations, endowments and sovereign wealth funds. The research was carried out via an extensive global survey during June 2018. The 650 institutional respondents were split as follows: 175 in North America, 250 in Europe, 175 in Asia and 50 in Latin America. Respondents were sourced from 15 different countries.
**Sustainability in this study was defined as a 'forward-looking, holistic approach to investment. There are various styles of sustainable investing, including full integration, exclusionary screening and best-in-class investing'.
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*as at 30 June 2018