Investing sustainably remains a minor factor in the investment decision-making process despite institutional investors’ expectations it will grow in importance, according to Schroders' Institutional Investor Study 2018.
The study – which surveyed 650 investors encompassing approximately USD24 trillion in assets – has identified a mismatch between institutions’ perceptions of the importance of sustainability and what is still happening at the coalface of their investment process.
Almost a third of investors (32 per cent) said that the sustainability focus of the investment had little to no influence on their investment decision-making, significantly less important than factors such as strategic asset allocation, fund manager track record, anticipated return and risk tolerance.
The study however found that sustainability was a bigger focus for larger institutional investors. Investors who did place greater emphasis on sustainability tended to have a longer-term investment horizon, more investment confidence and prioritised risk-adjusted returns.
Some 32 per cent of those that had holding periods of at least five years stated that sustainability was a significant influence. This compares to 23 per cent of investors whose investment horizon was between three and five years.
Investors more focused on sustainability were markedly more confident in achieving their return expectations. Well over half (59 per cent) were at least reasonably confident of meeting their expectations, compared to 37 per cent of investors who did not prioritise investing sustainably.
They also focused on generating risk-adjusted returns, with 66 per cent targeting this approach compared to 53 per cent who were less focused on sustainability.
Overall, just under three quarters of investors (74 per cent) globally stated that investing sustainably would grow in importance over the next five years, up on 67 per cent a year ago. A little under half (47 per cent) said they had increased their allocations to investing sustainably over the last five years.
Corporate strategy, climate change and accounting quality were identified as the most important issues investors should engage companies on.
However, over three quarters of investors (77 per cent) admitted they found investing sustainably at least somewhat challenging – the same proportion as last year. Performance concerns were at the forefront of their challenges, with 51 per cent citing this as an obstacle to investing sustainably, up on 44 per cent a year ago.
A lack of transparency and difficulty measuring risk were the other main challenges investors said hindered investing sustainably.
Over a third of investors (34 per cent) globally said that evidence demonstrating that investing sustainably delivers better returns would boost their allocations to investing sustainably. Notably, this rose to just under half (49 per cent) for investors in North America.
Jessica Ground (pictured), Global Head of Stewardship, Schroders, says: “There remains a gulf between institutional investors’ sustainable investment aspirations and the reality of how they prioritise these factors in their investment decision-making.”
“Investors clearly recognise that investing sustainably is going to be more and more important going forward, but this approach is yet to sit at the heart of their investment process.”
“This study demonstrates that investors who prioritise investing sustainably tend to have longer-term investment horizons and greater confidence about achieving their return targets.”
“Empowering investors to think longer-term and avoid making short-term, knee-jerk investment decisions has also been a growing focus of policymakers globally.”
“Over time, this study highlights that sustainability is going to increasingly sit alongside institutional investors’ more long-standing investment priorities, although there still remain barriers to overcome to achieve this in the near term.”
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