The vast majority (96 per cent) of institutional investors feel they have an important role to play in addressing the world’s most pressing challenges, including climate change, social and economic inequality and the need for infrastructure development, according to a new survey by Natixis Investment Managers.
About half (48 per cent) of survey respondents said institutional investors should put capital to work to address environmental, social and governance issues. The same amount said they should champion corporate governance including enhanced diversity and inclusion policies and practices, while slightly more (49 per cent) said they should use their investment clout to influence the companies in which they invest.
Two-thirds (65 per cent) of institutional investors said they believe ESG analysis has a valid place alongside fundamental investment analysis and 54 per cent said ESG is a method for discovering alpha. Some 70 per cent said they expect that using ESG will be standard practice in the investment industry within the next five years. Even so, 71 per cent said it remains difficult to evaluate which ESG data is material to investment analysis.
Looking to asset classes, three-quarters (78 per cent) of survey respondents said they’re invested in sustainable infrastructure projects, many of which generate ESG benefits in addition to financial returns. About a third (32 per cent) said they want to increase their allocations to infrastructure, while another third (34 per cent) are concerned about associated risks, especially in frontier or emerging markets.
“Impact investing has vast promise and the possibility for win-win arrangements on a massive scale, but these types of initiatives often present risks that are prohibitive for institutional investors,” said Dave Goodsell, executive director of Natixis’s Center for Investor Insight, in a press release. “Platforms such as blended finance have the potential to make investing in socially beneficial projects more realistic for institutional teams and free up capital to improve living conditions around the globe.”
Notably, investors are expressing these views in an investment environment offering many challenges. Even before the coronavirus pandemic, institutional investors were grappling with historically low interest rates that have pushed their future obligations higher, the report said. While making efforts to maintain long-term perspectives, 48 per cent of investors said their ability to execute long-term strategies is inhibited by the market’s focus on short-term performance expectations. Further, 31 per cent reported pressure from their own boards’ focus on quarterly results.
“Institutional investors must now find ways to meet their mandates in a world that’s even more yield-starved while facing unprecedented social, political, financial and environmental threats,” said David Giunta, chief executive officer for the U.S. at Natixis Investment Managers, in the release. “We’re seeing institutions draw on a wider variety of assets and resources now more than ever to achieve their long-term objectives.”