Nearly two-thirds of institutional investors say they’re planning to increase their allocations to real assets over the next two years, amid a backdrop of inflation and sustainability challenges, according to a survey by Aviva Investors.

The survey, which polled 500 institutional investors from around the world, found nearly half (47 per cent) said they have existing real asset allocations of up to 10 per cent and a similar percentage said they expect to lift their exposure by up to 10 per cent.

While diversification remained the No. 1 driver for investing in real assets, the percentage of respondents that cited it as their primary reason dropped from 64 per cent in 2020 to 57 per cent in 2022. Half (53 per cent) of respondents said they invested in real assets mainly to generate inflation-protected income, up from a third in 2020. Among North American respondents, the percentage rose to 63 per cent.

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More than a quarter (28 per cent) of institutional investors said they use real assets to make a positive environmental, social and governance impact, up from 17 per cent in 2020. Respondents said the key motivations for their shift to sustainable real assets were an alignment with corporate values (60 per cent), risk management (58 per cent) and increasing evidence of improved financial performance from sustainable investing (54 per cent). Meanwhile, the top three risks cited by respondents were greenwashing (52 per cent), high valuations (44 per cent) and difficulty in evidencing or measuring positive impacts (43 per cent).

More than three-quarters (79 per cent) of respondents said they favour a fund or strategy that prioritizes financial returns while integrating ESG factors. However, while the vast majority (90 per cent) of North American respondents said they prefer a return-led approach, this percentage decreased among respondents from Asia (82 per cent) and Europe (71 per cent), which cited a preference for strategies with a pure ESG focus.

While half of respondents said they’ve made a net-zero commitment, fewer than a quarter (24 per cent) said they’ve yet to make a commitment and have no plans to do so, as was the case for 39 per cent of North American respondents. Additionally, more than half (56 per cent) of respondents said they were unsure or lacked confidence in their ability to meet their long-term net-zero and sustainability commitments.

Nearly two-thirds of institutional investors said a global recession (63 per cent) and inflation and interest rate increases (62 per cent) were the biggest potential threats to real assets over the next 12 months. As well, respondents cited difficulties in finding suitable investment opportunities (53 per cent), as well as high transaction costs and asset valuations (50 per cent each), as the greatest barriers to investing in real assets.

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