ESG and sustainability are emerging as key drivers of growing institutional investor allocations to real asset investments, and nearly all investors now consider ESG factors in their real asset investment decisions, according to a new study released by Aviva Investors.
For the report, Real Asset Study 2023, Aviva Investors polled 500 institutional investors, including pension funds, insurers, global financial institutions and official institutions, across Europe, North America and Asia, representing combined assets under management of $3.5 trillion, in a survey conducted by CoreData Research.
The study found a growing appetite for real asset investments, with nearly two thirds of investors planning to increase allocations to real assets over the next two years, compared with only 12% expecting to reduce exposure. While diversification remains the primary motivation for investing in real assets, followed by the ability of the asset class to provide inflation-linked income, sustainability factors have become an increasingly important driver, with 28% of respondents reporting capturing positive ESG impacts as a primary reason for allocating to real assets, up significantly from just 17% 3 years earlier.
Additionally, the report found that the “sea change in attitudes towards ESG and sustainable investment approaches” has extended to real assets, with 93% of investors considering ESG factors in real asset investment decisions, including 17% who consider the matters as “critical and deciding” factors. Similarly, ESG factors featured prominently in the top reasons for investors to reject or divest from real asset investments, with lack of clarity around ESG credentials or impact reported by 38% of respondents, and concerns over the level of performance or disclosure on ESG grounds by 32%, ranked only behind historical underperformance at 47%.
More than one quarter of the respondents reported plans to increase allocations to sustainable real assets, with renewable infrastructure as a primary beneficiary, with 44% already having exposure and planning to increase it and another 15% considering investment.
The report examined the key drivers of investors’ decisions to increase allocations to sustainable real assets, led by alignment with corporate values, risk management and increasing evidence of financial performance from investing sustainably. The study also revealed the greatest risks to sustainable real assets investments, with over half of respondents reporting included greenwashing, followed by high valuation and difficulty in measuring impact.
The study found that the greatest support for investment strategies that combine the potential for financial returns as well as positive ESG effects. According to the report, these factors highlight energy transition-focused investments as a “sweet spot,” with top rankings across both factors. 50% of investors reported that they see investments supporting the energy transition as providing the best ESG impact, and 56% said that the theme provides the best financial returns. While 42% reported that investment themes incorporating net zero targets could provide the best ESG impact, only 17% argeed that the theme could also provide the best financial returns.
Daniel McHugh, Chief Investment Officer, Real Assets, at Aviva Investors, said:
“The ability of real assets to provide inflation-linked income has woken investors up to the attractiveness of these strategies beyond simply being a diversification play. They are now playing a meaningful role in overall portfolios, offering investors a broad menu of options with varying degrees of risk and inflation protection built in. The Study shows that demand is also being driven by the ability to assess the positive impact of these investments beyond returns, such as contributing to sustainability-related objectives.”
Click here to access the report.