net zero carbon comes with performance strings attached
Investors are putting their money behind sustainability, but performance still matters. Image Canva.
  • A major survey found diversification losing ground to inflation protection and ESG.
  • Environmental, Social and Governance is driving global changes across all markets.
  • Performance remained a priority over ESG impact when selecting managers.

Environmental, Social and Governance (ESG) is driving change across global corporate, investment and consumer markets. 

The physical and economic environment has led investor mindsets in the latest round of surveys. While not consistent globally, the majority of investors polled are looking more favourably towards reducing the mark their investment has on mother nature, with potential recessions and inflationary madness also gaining real estate in investors’ minds.

New survey comes as 2022 AGM season was marked by ESG backlash

ESG (environment, social, and governance) has been one of the hottest topics around, with shareholders making it known that it’s either the ESG way or the highway.

In Georgeson’s 2022 AGM season review, the company found climate action resolutions tripled, the report examined the AGMs of companies in the United Kingdom, the Netherlands, Germany, Spain, France, Switzerland, and Italy.

In 2021, the report found that 12 companies put forward climate-related resolutions, this year saw 36 companies.

While the number of climate resolutions rose, shareholder votes went the other way. Average shareholder support for the E, in ESG initiatives, dropped from 97% in 2021 to 91% in 2022; the lowest level of support recorded in 2022 was 76.3%.

More on the report here.

Aviva survey finds key investment drivers retain a lead, but a focus shift is on the cards

Aviva Investors Real Assets Study 2023 saw the polling of 500 institutional investors from across the UK, Europe, North America, and Asia Pacific region, with US$3.5 trillion of assets under management collectively.

Among the key takeaways:

  • Real estate remains the investors’ choice for real assets
  • Diversification remains the prime driver for investing in real assets
  • Some steam was lost from the above two drivers
    • Real estate is down one percentage point over the past two years
    • Diversification is down to 57 per cent from 64 per cent three years ago
  • Inflation protection and ESG focus is on the rise
    • Mixed results were seen, with North America pushing back on ESG
  • A global recession is among the prime concerns for risks moving forward
    • Inflation, interest rates, and real and trade wars hot on the heels of recession as a risk to look out for

Sustainability

Sustainability was a major focus for investors. The question arose: did the walk match the talk? It seemed an off-kilter gallop with the cart going before the high horse:

“… beliefs over the importance of sustainable investing are running slightly ahead of perceptions of the impact potential of sustainable real assets.

“Two-thirds of our respondents reported their organisation has a responsibility to invest sustainably, but only one-half believe real asset investments can have a more direct ESG impact versus listed equities and credit.”

Aviva Investors Real Assets Study 2023

Taking up the slack of reduced focus on diversification: inflation-protection and ESG. The survey found that: “Three years ago, one-third of investors allocated to real assets mainly to generate inflation-protected income. Today, that figure has risen to 53 per cent…”

Regionally, the report found inflation was a greater concern than diversification in Europe, and 63 per cent of North American institutional investors put inflation-protected income as their number one driver.

The survey also found that the use of real assets to make a positive ESG impact has risen from 17 per cent, three years ago, to 28 per cent, today.

An ESG focus was concentrated around Europe and Asia, with a significantly smaller proportion of American investors putting the matter front of mind; one potential driver of lower ESG prevalence in the USA, the report noted, could be the politicisation of ESG.

In other sustainability matters raised in the report and survey:

  • Half of the investors polled have made a net-zero commitment, with 24 per cent either not having plans or not intending to act.
  • Risks included greenwashing, high valuations, and challenges in providing evidence or measuring positive impacts.
  • Returns remained a priority, “79 per cent [favoured] a fund or strategy that [prioritised] financial returns while also integrating ESG factors.
  • ESG focussed pooled funds were tipped to top investors lists this year
  • Performance record (81 per cent) outweighed the ability to evidence ESG impact (72 per cent) when selecting a manager.

Aviva Investors chief investment officer, real assets, Daniel McHugh noted: “The study shows that demand is … being driven by the ability to assess the positive impact of these investments beyond returns, such as contributing to sustainability related objectives.”

aviva investors chief investment officer real assets daniel mchugh
Daniel McHugh, Aviva Investors Chief Investment Officer, Real Assets. Image: Supplied.

“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.”

“It is clear real assets investors value the different access routes available to them. Gone are the days when allocations to each asset class within real assets would be looked at in isolation. Instead, investors are often looking for a multi-asset and outcome-led approach, which can align with corporate values. 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.”

Almost half of those polled (47 per cent) reported existing real asset allocations of up to ten per cent. Moving forward, a similar number (46 per cent) were looking to increase their exposure by up to ten per cent.

Real estate had a “comfortable lead” as a real asset strategy at 30 per cent, the figure down from 31 per cent two years ago. Aviva’s experts expect the 30 per cent figure to remain the case for the next two years.

How is your institution’s real assets portfolio allocated today?

aviva investors real asset report 2023 real estate graph
Source: Aviva Investors Real Assets Study 2023.


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