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Institutional investors seek ESG benefits and financial returns, survey finds

1st February 2024

Institutional investors in real assets are looking to sustainability to boost financial returns but are lagging on net zero targets, a study from Aviva Investors found.

The UK investment manager surveyed 500 institutions worldwide, of which 44% had more than $25 billion of assets under management. Nearly three-quarters (73%) of institutional investors want to prioritise financial returns when investing in sustainable real assets. Furthermore, 53% see evidence of improved financial performance as driving them to invest – or increase investment – in sustainable real assets, followed closely by their ability to show sustainability-related impact (51%).

Only 5% did not consider ESG/sustainability factors when making real asset investments, down from 7% the previous year.  However, ESG was a “critical and deciding factor” for only 17% of institutions (21% in Europe). More than three-quarters of investors said ESG was one of several factors considered or a “growing but not essential” consideration. 

The key driver for investing in sustainable assets was their ability to generate financial returns, cited by 73% of investors, ahead of decarbonisation potential (cited by 53%) and excluding assets on ethical grounds (51%).

The most favoured real assets investment theme or sector for expanding sustainable investment was renewables infrastructure, cited by 49% of respondents. However, decarbonising existing assets (36%), low-carbon, new-build assets (32%), social housing and infrastructure (30%) and nature-based solutions (27%) were also cited.

For investors without sustainable assets exposure, nature-based solutions was a surprising top choice (cited by 25%), followed by social housing and infrastructure (23%), sustainable lending (23%) and low-carbon, new-build assets (20%).

Addressing the energy efficiency and carbon emissions of existing buildings hits the sweet spot of having the most ESG impact (cited by 71% of investors) and the best financial returns (70%). However, from a purely financial returns point of view, investing in emerging technologies was thought to be the best investment (73%).

Despite the high percentage of investors favouring sustainable or low-carbon investments, there has been mixed progress with net zero targets. Only 15% said they had made a net zero commitment and were reporting progress, while 17% said they had no net zero target nor any intention to develop one. This was the case for 32% of North American investors.

However, 57% overall have made a net zero commitment, even though 21% had made a commitment but not taken action. More than half those surveyed (53%) said they were either not confident at all or somewhat unsure of what was needed to meet their long-term sustainability commitments.

The key material risk for sustainable real assets investment was the difficulty in measuring positive impact, cited by 47%. The risk of poor performance was also cited as a concern, chiefly by North American investors (53%), but also Asia Pacific (46%) and Europe (36%).

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