Institutional investors are looking for investment opportunities that tap into the energy transition, as impact investing becomes a greater focus, new research has found.

Schroders Institutional Investor Study 2022 surveyed 770 institutional investors including pension funds and insurers managing $27.5trn (£23trn) in assets.

Just under half of respondents said impact investing was their preferred approach to implementing sustainability, alongside ESG integration into the investment process, and positive screening. This is a significant increase on 38% a year ago and 34% in 2020.

The study reported growing interest in the energy transition, and demand for investment solutions in this area, especially from UK and Asia Pacific-based investors.

Some 59% of investors surveyed said new investment opportunities addressing the energy transition would encourage them to invest more into sustainable investments.

Performance concerns

Meanwhile, performance concerns about sustainable investing have ticked up over the past 12 months, the research found with 53% of investors citing this as a challenge compared with 38% a year ago.

This is a significant reversal with worries about performance having consistently fallen year-on-year until now, and likely reflects the more challenged market environment, Schroders said.

Aside from performance, a lack of transparency and reported data was also recognised as one of the major obstacles holding investors back from investing sustainably.

A focus on governance

Engagement remains a key focus for investors globally, with 59% stating tangible evidence of real-world outcomes was the most important component of any active ownership strategy.

Specifically, almost two-thirds of investors believed governance, including transparency of voting and shareholder resolutions, was the top engagement theme. A focus on human rights and the climate completed the top three in terms of engagement priorities.

Encouragingly, almost four in ten investors globally said they had committed to reaching net zero by 2050, with European investors leading the field.

One-third of North American investors are still exploring the transition but are not yet committed to specific targets. 

Investment outlook

More broadly, investors’ return expectations for the next five years have deteriorated compared with a year ago, compounded by fears about rising inflation and interest rates, geopolitical uncertainty and a global slowdown.

Fewer investors estimated that return on their total portfolio will be above 6% over the next five years (42% vs 47% in 2021), while the number of investors forecasting returns of 4% or less increased from 17% to 27% this year.

In the face of these concerns, investors have been scaling back their equity exposure, reflecting Schroders’ own house positioning.

Describing the report’s findings as “striking”, Andy Howard (pictured left), global head of sustainable investment at Schroders, said it revealed that “more and institutional investors want to measure, manage and deliver impact”.

He added: “Recognising concerns over tensions between sustainable investment and return goals, it’s becoming clear that thoughtful approaches grounded in investment experience will be increasingly critical.”

Investment managers respond

Commenting on the reports findings, Amelia Overd, investment manager at Castlefield Investment Partners, said improvements in measuring impact could be driving the change.

 “The shift towards impact investing featuring more heavily within the key pillars of sustainable investing is likely to be aided in part by the development of impact measurement.

“While still very much a work in progress, it is featuring more and more across the sustainable investment landscape as methodologies develop. This should help investors to have greater transparency about the impact of their investments, and this is something we are seeing clients question more and more.

“It should also help asset managers prove their sustainability credentials in light of increasing regulatory and reporting standards.”

EQ Investors assistant portfolio manager Tertius Bonnin echoed Overd’s view that increased availability of ESG data has led to more widespread adoption of ESG factors within investment processes.

“At its core, ESG integration acts as a new lens with which to assess investment risk. Given the choice, which sane investors would want to invest client capital without considering all the facts available?” he asked.

He said EQ Investors is encouraged by the fact the investment community is increasingly embracing impact investing, with clients being consulted more about their sustainability preferences.

“In cases where investments are achieving a negative impact, clients are often shocked that their investments are so far detached from their values,” he said.

“One of the interesting moves we’ve seen in recent years is the development in understanding with regards to sustainability preferences and the nuance that is emerging – there is no one-size-fits all-portfolio solution here.

“A prime example of this is how one might approach the energy transition – a topic around which we also see a lot of interest from our clients: some investors may want to benefit from the investment opportunity in commodities created by a move to electrification while other investors may want to exclude extractive companies and just invest in solutions.”

He pointed to the Schroder Global Sustainable Value Fund and the Kayne Anderson Renewable Infrastructure Fund as innovative products designed to tap into sustainable investment themes with a growth slant.