Nine out of ten global institutional investors actively consider ESG and sustainability in their real assets investment decisions, according to Aviva Investors’ annual survey which was published yesterday.
The Real Asset Study, the fifth done by Aviva, canvassed the opinions of 500 pension funds, insurers, global financial institutions and official institutions across the world representing over €3.5 trillion in assets.
The survey found that 93% of respondents take ESG into account and 17% consider it a critical factor. Half of institutional investors have a net-zero commitment in place and 28% allocate to real estate to capture its positive ESG impact, compared to just 17% three years ago.
Respondents also said they consider greenwashing the biggest material risk to investing in sustainable real assets, ahead of concerns over valuations.
“The study shows that investors’ demand is also being driven by the ability to assess the positive impact of these investments beyond returns, such as contributing to sustainability-related objectives,” said Daniel McHugh, chief investment officer, real assets, Aviva Investors.
According to the survey’s findings, 67% of institutional investors feel they have a responsibility to invest sustainably. However, more than three-quarters favour a fund or strategy that prioritises financial returns while integrating ESG factors. This preference for a returns-based approach holds true for 90% of investors in North America, compared to 82% of Asian and 71% of European investors.
Investments supporting the energy transition are expected to secure the best financial returns according to the majority of respondents, as well as being most likely to provide the best ESG impact.
The Aviva survey also found that two-thirds of respondents plan to increase their allocations to real assets over the next two years, with 46% planning to do so by up to ten per cent. The highest allocations are by investors in North America, where almost a quarter have over than 20% of their portfolio in real assets, compared to 19% of European and 17% of Asia-Pacific investors.
Diversification remain the primary driver for investing in real estate, but over 50% of respondents said they allocate to the sector for its ability to provide inflation-linked income.
“Inflation had an acute impact on the economic and investment landscape in 2022, making it increasingly expensive to hedge against it through traditional asset classes, whilst rising interest rates have eroded returns,” said McHugh. “The ability of real assets to provide inflation-linked income has woken investors up to the attractiveness of these strategies beyond simply being a diversification play. They are now playing a meaningful role in overall portfolios, offering investors a broad menu of options with varying degrees of risk and inflation protection built in.”
Looking ahead, the difficulty in finding opportunities and transaction costs are considered the greatest barriers to increasing allocations to real assets over the next 12 months. Illiquidity is the top concern for investing in real assets more generally, while valuation risk is also a big concern, especially for pension funds.