A dearth of clear, agreed sustainability definitions present a challenge to investors looking to invest sustainably.

This is according to the results of the Schroders Institutional Investor Study, which surveyed 650 institutional investors across 26 countries during April 2020.

Gearing up against greenwashers

Greenwashing is about falsely communicating the environmental benefits of a product or service in order to make an entity seem more environmentally-friendly than it really is.

The majority of surveyed institutional investors cite greenwashing as the biggest impediment to sustainable investing.

Figure 1: Challenges of investing in sustainable investments

Hannah Simons, Head of Sustainability Strategy, said: “The astonishing growth of sustainable investing over the last few years has seen a vast range of new ideas and products come to market. With new approaches comes new jargon but definitions are not always clear.

We’re committed to providing clarity on the fast-evolving sustainability landscape. To help with this we have written articles which define the key terms and explain the different approaches to sustainable investing: Everything you need to know about sustainable investing and 50 terms every sustainable investor should understand.”

Best-in-class and active ownership in greater demand

It’s striking to see what the difference one year can make to investor demand.

For example, while the majority of institutional investors (67%) said that integrating sustainability into the investment process was their preferred approach, demand for positive screening (which focuses on best in class companies or investments), and active company engagement, has accelerated between 2019 and 2020.

Elly Irving, Schroders Head of Engagement, said:“Active ownership has become more important than ever. Investors have a duty to hold companies accountable and an opportunity to drive positive change. It’s why Schroders has such a strong commitment to active ownership, demonstrated by our 20 year history. By engaging with companies and using our voting rights, we can drive sustainable change to better meet the investment needs of our clients.

“As we close in on 100% integration across all of our assets, engagement has evolved from a Sustainable Investment Team activity, to an investor-driven activity that’s becoming prevalent across the whole firm. We have achieved this through enhancing our infrastructure to support the engagement efforts of our fund managers and analysts which allows us to track, monitor and communicate progress effectively.”

Figure 2: Positive screening and active ownership rise in importance

Source: Schroders

Fewer challenges to sustainable investing

Positively, the study suggests that the proportion of sustainability sceptics is on the decline and that investors find sustainable investing less of a challenge than in previous years. In 2020, 70% of respondents said they found sustainable investing challenging in 2020, down from 77% in 2017.

This year, 45% of global institutional investors cited performance concerns as a challenge of sustainable investing. This figure has dropped since 2018 where more than 50% of respondents cited performance concerns as their top challenge.

At the same time, there has also been an impressive reduction in investors who don’t believe in sustainable investments. In 2017, 18% of investors held this view but today that figure has almost halved to 11%.

Only 13% of respondents do not invest in sustainable investments, down from 19% in 2019.

Potential for better performance attracts some investors…

We also asked why institutional investors are investing sustainably.

For the majority of respondents (58%) it’s about aligning  to corporate/internal values with regulatory and industry pressure in second place (49%).

Figure 3: Drivers of sustainability focus

However, a significant proportion (35%) of institutional investors invest sustainably because they believe there’s potential for higher returns and lower risk. Findings were similar in the individual investor survey (the Schroders Global Investor Study): 42% of respondents are attracted to sustainable investing because they believe they’re more likely to offer better returns.

In our 2018 institutional investor survey, more than 50% of respondents cited performance concerns as a challenge to sustainable investing. This figure reduced to 48% in 2019 and stands at 45% in 2020.

Figure 4: Why investors regard sustainable investing as attractive

Governments responsible for mitigating climate change

Institutional investors also tend to believe, as do the individual investors surveyed in our Global Investor Study, that national governments have the biggest role to play in mitigating climate change.   

Andy Howard, Schroders Global Head of Sustainable Investments, said:  "The growing regulatory focus on ensuring that asset managers meet sustainable investing definitions and criteria is to be welcomed. Yet it is also crucial that investors do not as a result feel overwhelmed by the growing amount of sustainability interpretations and demands.

“So it’s vital that asset managers work closely with clients to help them navigate the complex world of sustainable investments and support them in achieving their objectives.

“It is also crucial for us as asset managers to convince investors that investing sustainably should not be at the expense of delivering robust returns and meeting their long-term objectives.

“Positively, these findings deliver striking evidence that institutions globally are increasingly recognising that investing sustainably should now be a core component of their asset allocation process.”

About the Schroder Institutional Investor Study:

The global study was commissioned by Schroders for a fourth consecutive year to analyse institutional investors and their attitudes towards investment objectives, performance outlook and risks to their portfolio. The respondent pool represents a spectrum of institutions, including pension funds, insurance companies, sovereign wealth funds, endowments and foundations managing approximately $25.9 trillion in assets. The research was carried out via an extensive global survey during April 2020. The 650 institutional respondents were split as follows: 179 in North America, 248 in EMEA, 173 in Asia Pacific and 50 in Latin America. Respondents were sourced from 26 different countries.