Investors globally 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, 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 that they would subside a year ago. 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 the 3Ds of decarbonisation, changing demographics and deglobalisation all having the potential to keep inflation high. 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 respondents believe that investors will look towards investing in companies with more localised supply chains. Developed market equities (32%) and private equity (23%) are believed to present the best opportunities over the coming years.
Additionally, the majority of respondents (65%) believe that one of the main benefits of investing in private assets is that it can provide a deeper source of diversification over the next two years. This is one of the reasons why a third of global respondents are considering increasing their allocations to this asset class over the next two years.
Accessing investment opportunities in the energy transition
This year’s study has found that investors see the transition to net zero as an important area of focus. More than two-thirds (67%) of global respondents think it is likely or highly likely that the energy transition will spur investment in innovation, creating significant investment opportunities.
Around half of global investors believe that infrastructure/renewables are best-placed to capture the investment opportunities presented by decarbonisation trends in the medium-term. With this asset class poised to benefit from the green technology revolution, 41% noted that they expect to increase allocations to infrastructure over the next 12 months.
More broadly, over half of respondents are seeking to proactively harness the investment opportunities presented by the energy transition and related technological revolution though a greater exposure to private assets. Similarly, when asked why they would consider investing in sustainability and impact strategies, two-thirds of 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.
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 (i.e. this is simply good business) and 43% highlight having a positive impact on people and planet as being one of the top drivers for sustainable investing.
Investors identified infrastructure (44%) and natural capital & biodiversity (41%) as the best-suited asset classes within private assets to deliver their sustainability and impact objectives, with this focus growing as their investment timeframe extends.
However, this year's study demonstrates that support is needed to help investors with impact investing, with measurement being a key challenge. Three-fifths of investors (60%) believe the most important criteria when considering an allocation to impact-focused investments is that the impact be easily measured and understood.
Over half of respondents identified a lack of standardisation in terms of measurement, process, tools and metrics etc to be the biggest obstacle for investing in private assets strategies focused on sustainable investing.
Mixed levels of support for net zero targets
While half of global respondents have already made commitments to reaching net zero across their portfolios, a little over a fifth (21%) 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%), while the majority of respondents with no commitment were based in the US (44%).
Across all markets, it is felt that more support is needed in measuring and tracking net zero pathways. About half of respondents think their organisation mostly needs support in measuring and tracking their net zero path, up to 51% from 37% last year. Results showed that 49% of 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.
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 the 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.”
Andy Howard, Global Head of Sustainable Investment, Schroders, commented:
“Now in the seventh year of conducting this study, we are starting to see some new trends emerging as investors continue to grow and evolve their approach to sustainability.
"This year’s findings highlight that institutional investors are increasingly focused on the thematic exposures and impacts of their investments. This implies clients want to take a more nuanced approach to sustainable investing than in the past. They increasingly take integration as a given and instead want to harness more focused opportunities.
"As the world grapples with this new regime shift and the trends of deglobalisation, decarbonisation 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.
“Sustainability is a complex and broad topic. It is also fast-changing, whether that be through new research, expanding data availability, regulation or government action. In this landscape, we cannot stand still. We will continue to review the priorities and expectations of our clients and market best practice to ensure we can continue to move forward.”
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 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.”
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