Bfinance survey finds investors rethinking ESG and asset class exposures

A new snap poll from independent investment consultancy, bfinance, on institutional investors’ responses to pressing macroeconomic and geopolitical developments has revealed widespread re-evaluation of ESG strategies and asset class exposures. 

Some 418 institutional investors (pension funds, insurers and others) from 39 different countries contributed to the What Are Investors Thinking Now? study.

The results show that nearly half of investors had direct exposure to Russia before Q1, of which 45 per cent have either fully exited or are in the process of doing so, obstructed in many cases by illiquidity and lock-ups. Meanwhile, 39 per cent of investors—including 41 per cent of pension funds—said that said recent geopolitical developments will lead or have already led to a re-evaluation of their ESG approach, either internally or via the changing practices of their external asset managers. 

Furthermore, four in five investors expressed concern that inflation and rising rates would impair their ability to achieve medium-term investment objectives and 41 per cent expect to increase the inflation sensitivity of their portfolios this year. As such, the poll showed a corresponding shift in asset allocation, with real assets receiving particular attention: 46 per cent of investors expect to increase exposure to infrastructure in the next 12 months.

The firm writes that following a dramatic and sobering first quarter of 2022, many institutional investors are grappling with pressing macroeconomic and geopolitical developments and must also now scrutinise how their portfolios have weathered significant market declines. 
While 52 per cent of investors had no direct exposure to Russia heading into Q1, nearly half of investors had direct exposure to Russia. During Q1, 45 per cent of investors with direct exposure to Russia either fully exited (10 per cent) or are in the process of doing so (35 per cent), the latter of which has been caused by obstructions to illiquidity and lock-ups.

Alternative Risk Premia (ARP) and hedge fund managers delivered high satisfaction ratings in Q1, with 51 per cent and 57 per cent respectively. However, investors showed the lowest satisfaction with the performance of asset managers in Emerging Market equity and debt (23 per cent and 24 per cent satisfied).

39 per cent of investors said that recent geopolitical developments will lead or have already led to adjustment of their ESG approach, either in-house or via changes made by their external asset manager partners. Several others also cited that while the conflict had not itself affected their processes, it reinforced the need for a sophisticated ESG approach. Furthermore, emerging market country exposures, controversial weapons and fossil fuel firms are coming under particular scrutiny, bfinance notes.

With four in five investors expressing concern that inflation and rising rates would impair their ability to achieve medium-term investment objectives, 41 per cent of investors expect to increase the inflation sensitivity of their portfolio in 2022. 14 per cent of investors are “very concerned” about the impact of inflation and rising rates on their ability to achieve medium-term investment objectives; 68 per cent are “moderately concerned”.

Macroeconomic conditions are boosting allocations to illiquid strategies, with real assets leading the way. 46 per cent of investors expect to increase exposure to infrastructure in the next 12 months vs. 31 per cent in the last 12 months. Strong momentum is also evident for surging Private Debt and Real Estate allocations, with 27 per cent of investors increasing exposure to equities in the past year while 22 per cent plan to do so. Other allocations on the rise include Private Equity, Hedge Funds and Agriculture/Forestry.

Kathryn Saklatvala, Head of Investment Content at bfinance, says: “We are very grateful indeed to the senior investors who contributed their insights a few days ago for this report. To some extent, the asset allocation changes we are seeing here represent a continuation of some longer-term shifts, such as the shift in favour of illiquid strategies and real assets. 

“Yet investors’ concerns about inflation and rising rates—which come through in these statistics—are giving greater impetus to these trends. It is particularly interesting to see the large minority of respondents for whom geopolitical developments are prompting a change in ESG approach. This has chiefly been focused on topics such as weapons manufacturers, energy companies and country exclusions. Even among those that indicated that the conflict would not affected their ESG approach, many said that it had illustrated the importance of having a robust approach here. Indeed, we saw cases where ESG-oriented investors had significantly reduced or eliminated Russia exposure ahead of 2022, which benefited performance in Q1.”

 

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