Investors up their exposure to sustainable real assets

Aviva survey finds 93% are factoring ESG into decisions

Despite nine in 10 institutional investors considering ESG as a factor in real assets investment decisions, many do not see climate as the biggest material risk.

In its fifth annual Real Assets Study, Aviva Investors canvassed views from 500 institutional investors around the world, including pension funds, insurers, global financial institutions and official institutions, together representing more than $3.5trn in assets.

It found 93% of respondents consider ESG a factor in real assets investment decisions, with 17% saying it’s critical. But just 22% saw climate-related concerns as a material risk.

“This has to change,” said Daniel McHugh, chief investment officer, Real Assets, at Aviva Investors.

“Currently, capital pricing models do not adequately capture new factors such as this in their numbers, which carry material risk for investors. 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.”

Use of sustainable real assets

The report also found the use of ESG real assets is on the up – at 28% compared with 17% three years ago. A third of investors in Europe and Asia are using real assets to make a positive ESG impact, with just 10% doing the same in North America.

This upwards trend appears set to continue, with 27% planning to increase their exposure to sustainable real assets. Renewable infrastructure is set to be the biggest beneficiary, with 44% of investors already having exposure to this asset type but plan to up their weightings.

For now, real estate equity is the most popular asset class choice for investors across the regions, with those investments seeking to aide the energy transition also taking the top spot. Although when it comes to social considerations, 73% prefer infrastructure.

But only half believe real asset investments can have a more direct ESG impact versus listed equities and credit, and just over a half are unsure in their ability to meet long-term net-zero and sustainability commitments from real asset investments.