Potential sub-par performance of sustainable strategies has re-emerged as a top concern for institutional investors, according to a new global survey.
The Schroders 2022 survey of more than 770 global institutional investors representing US$27.5 trillion in assets under management found more than half of respondents cited performance as a key concern around sustainable investment.
“After a consistent year-on-year decrease around performance concerns, this has now jumped back up to a major challenge (53% from 38% in 2021),” the Schroders report says. “This reflects performance of many sustainable strategies; after a few years of large growth-oriented stocks (which tend to be considered more sustainable by manager) leading market returns, the last 12 months has seen a reversal where energy prices have soared, benefitting oil majors and those companies typically seen as less sustainable.”
Performance ranked about on par with both greenwashing and poor data as the biggest downsides for sustainable investing: just under 50 per cent of respondents also rated inconsistent disclosure as a problem for the sector in a measure included in the annual Schroders survey for the first time in 2022.
“Given the speed at which [environmental, social and governance] ESG has grown globally in recent years and the regulatory scrutiny that is now felt across all regions, we believe the lack of consistent standards and reporting amongst asset managers may be a key contributor to the 48% of respondents that selected this response,” the paper says. “With an ever growing quantity of ESG data available, investors need further clarity and consistency from managers about the information they report.”
Despite the surge in performance anxiety, Andy Howard, Schroders global head of sustainable investment, says in the report that “focusing on the long-term is key here”.
“As we move through market cycles, investment strategies may perform differently,” Howard says. “We have argued for many years that investing sustainably with a strong focus on robust returns should not be mutually exclusive, indeed thoughtful and considered approaches to sustainability are at the heart of delivering long-term investment returns.”
But regardless of current worries, the Schroders survey found sustainable investing is more-or-less entrenched in the industry with participants now tending to sophisticated environmental, social and governance (ESG) integration strategies while eschewing simplistic exclusion practices.
“Integration seems now to be the ‘new normal’ approach to implementing sustainable investing for global institutional investors, having been on a steady growth path for the last three years. It is now adopted by 75% of respondents, cementing it as the most favoured approach amongst investors. This is followed by positive screening at 53%,” the study says. “The data is clear, inclusive approaches are being viewed as an important aspect of achieving or driving change, rather than simply divesting which is now the least popular approach at 39%.”
Investors are increasingly targeting real-world outcomes via impact targets and ESG engagement, the Schroders report says, tackling issues such as climate change and human rights.
Kimberley Lewis, Schroders head of active ownership, says the world is “in an era of transition in many key areas, including climate change, equality, diversity and many more”.
“As active managers, we have a critical role to play in supporting that transition,” Lewis says in the report.
“Engagement is one of the important tools we can use to influence the companies in which we invest, to strengthen the long-term value of those assets, enhancing outcomes for clients, and to accelerate positive change towards a fairer and sustainable global economy.”
However, the study notes both internal and external factors are at play in the increasing adoption of sustainability principles among institutional investors with key motives evenly poised between alignment with corporate values (54 per cent) and the intention to have a positive impact on the world (50 per cent).
“Regulatory and industry pressure (47%) continues to be an important motive and has increased in importance from last year (43%),” the report says. “This is not surprising as we have seen an unprecedented number of new regulations emerge across the globe. The additional scrutiny has forced the industry to be more deliberate and purposeful in its analysis, reporting and controls it applies…”
About 40 per cent of the Schroders survey respondents were based in the UK, Europe or South Africa followed by 28 per cent in Asia-Pacific (including 70 Australian institutions), 27 per cent in the US with the remainder in Latin America.