According to the fifth annual Real Assets Study from Aviva Investors, 93 per cent of global institutional investors “actively consider ESG and sustainability in their real assets investment decisions”.
The report, which canvassed 500 institutional investors around the world representing more than $3.5 trillion in assets, also found that for 17 per cent, environmental, social, and governance (ESG) matters are a critical factor.
Two-thirds of respondents (67 per cent) reported their organisation has a responsibility to invest sustainably, but only half believe real asset investments can have a more direct ESG impact versus listed equities and credit.
Despite an increasing focus on ESG, more than three-quarters (79 per cent) favour a fund or strategy that prioritises financial returns whilst integrating ESG factors. This preference for a returns-based approach holds true for 82 per cent of Asia-Pacific investors, compared with 90 per cent of investors in North America and 71 per cent of European investors.
Investments supporting the energy transition, according to 56 per cent of respondents, are expected to secure the best financial returns as well as being most likely to provide the best ESG impact (50 per cent).
Meanwhile, the study found that greenwashing (52 per cent) represented the biggest material risk to investment in sustainable real assets. High valuations (44 per cent) and difficulty in evidencing or measuring positive impacts (43 per cent) were the next highest-ranked risks.
Daniel McHugh, chief investment officer, real assets, at Aviva Investors, said: “Whilst concerns about high valuations feature prominently in this year’s responses, just 22 per cent of institutional investors see climate-related obsolescence as the most material risk.
“Currently, capital pricing models do not adequately capture new factors such as this in their numbers, which carry material risk for investors. That has to change. As the market looks at assets through a net zero lens, even prime assets could become vulnerable. Investors must be alive to how quickly — and to what extent — obsolescence could accelerate and the potential impact it could have on portfolios.”
Related to the concerns about greenwashing, one-third of investors would not invest in or allocate more to real assets due to concerns over a fund’s ESG reporting (32 per cent), or because of discomfort with the timeliness and reliability of data (32 per cent).
Even with a greater investor focus on ESG factors, proven investment performance (81 per cent) is still the biggest influence on manager selection for sustainable real assets mandates.
The majority of respondents (77 per cent) said that they were satisfied with their managers’ performance on this front.
Respondents were less pleased with their fund managers’ ability to evidence ESG impact (58 per cent), despite this being an important consideration for 72 per cent of surveyed investors.
“With 81 per cent of investors citing performance track record as being the most important criteria in selecting real assets manager for a sustainable mandate, it is hugely important they choose an asset manager able to make relative value calls that also understands the challenges involved in achieving long-term ESG objectives,” Mr McHugh said.
