Stockholm (NordSIP) – The sustainable investment industry is maturing, according to the findings of two new surveys of asset owners conducted by FTSE Russell and BNP Paribas. The peer group for FTSE Russell’s 7th Annual Sustainable Investment Asset Owner survey consisted of 350 pension funds, plan sponsors, insurers, state entities, healthcare organisations, endowments, and foundations from 31 countries in Europe, the Middle East and Africa (EMEA), the Americas, and Asia Pacific.
Year-on-year decline deemed temporary
The overall response points to a decline in the number of asset owners applying or considering sustainable investment strategies. Five years of steady growth had culminated in 2022 with 88% of survey respondents implementing a sustainable investment strategy. This has now fallen to 80%, but FTSE Russell’s analysis indicates that the drivers of the decline are more complex than a simple loss of belief in sustainable investing. Feedback from the majority of respondents shows that while they maintain their long-term conviction towards sustainability themes, shorter-term macroeconomic pressures and geopolitical events have caused a slight shift in priorities. Rising inflation has compelled governments to raise interest rates, and the war in Ukraine has also increased volatility.
The survey results also highlight differences across global regions, with political pressure leading to U.S. state entities and larger asset managers publicly eschewing the integration of environmental, social, and governance (ESG) factors in their investment policies. The result is a much larger decline than in the other global regions.
Investors across all regions are also taking a more deliberate approach to fund selection. As the regulatory environment evolves some asset owners are waiting for clearer guidelines to take effect, citing the reputational risk associated with greenwashing. 36% of the respondents that had not yet implemented a sustainable investment policy were most concerned about greenwashing. Asset managers have also been downgrading some of their products that may previously have had overstated ESG credentials. These trends appear symptomatic of a maturing industry that is stabilising after an initial period of rapid growth.
Clients and plan members demand sustainability
FTSE Russell asked the asset owners for the rationale and motivation behind their adoption of sustainable investment strategies. Plan member or client demand was the standout driver, along with the mitigation of long-term risks. Only 30% of respondents pointed to hopes of achieving better risk-adjusted performance. Member or client demand is by far strongest in EMEA. Conversely, there has been a sharp drop in demand from Asia Pacific clients. The survey also explored the various barriers hindering the adoption of sustainable investment practices. In another indication of a maturing industry these barriers are generally decreasing year-on-year, with perceived improvements in data standardisation and better corporate disclosure. Investors remain frustrated by data coverage and the use of estimates in the calculation of metrics.
The other notable trends emerging from the survey include passive and active strategies achieving parity in terms of sustainable investment implementation for the first time. Fixed income has also risen up the ranks to be the top asset class for sustainable investment allocation, particularly in the Asia Pacific region. European investors are increasingly focused on sustainable infrastructure investments.
Trends in the Nordic Region
On a more granular level, the newly released ESG Global Survey 2023 conducted on 420 global institutional investors by BNP Paribas provides some insight into the specific trends in the Nordic countries. It cements the region’s reputation for being ahead of the global curve on sustainability, with the 63% of Nordic investors having already set timebound net-zero targets well ahead of the overall level of 39%. This translates into greater rates of carbon divestment, with 43% of Nordic investors already seeking to exclude carbon-intensive assets from their portfolios.
While Nordic asset owners currently implement ESG integration across the board, two-year intentions point towards a shift to thematic investment in areas such as healthcare, transition investing and food security. Almost half of the Nordic respondents expect to have adopted thematic sustainable investment strategies by 2025 as more such vehicles come onto the market. Faced with incomplete or unreliable ESG data, Nordic investors tend to make greater use of specialist vendors to access granular or local level information on their portfolio assets, particularly when it concerns private assets.
The feedback from these two global asset owner surveys shows a sustainable investment market undergoing rapid change. There are significant differences between investors’ current practices and their near-term expectations. Greater awareness of greenwashing has led to a more cautious approach from asset owners as they wait for regulatory improvements to bed in. Macroeconomic, Ideological and geopolitical factors are also playing a role, but the overall picture is of a maturing and evolving sustainable investment market that is here to stay.
