More than nine-out-of-ten (93%) global institutional investors consider ESG and sustainability in their real asset investment decisions, with 17% considering it a critical factor, according to research from global asset manager Aviva Investors.
Findings reveal that 64% of institutional investors plan to increase their allocations to real assets over the next two years, with 46% planning to do so by up to 10%.
Diversification remains the key driver for investing in real assets for most respondents (57%). Three years ago, one-third of investors allocated to real assets mainly to generate inflation-protected income – today, the figure has risen to 53%. The use of real assets to create positive ESG impacts increased from just 17% in 2019 to 28% today.
About 500 institutional investors worldwide – including pension funds, insurers, global financial institutions and official institutions collectively representing multi-trillion dollar assets – participated in the ‘Real Assets Study‘ by Aviva Investors, the global asset management business of Aviva plc.
The highest allocations are by North American investors, with almost a quarter having greater than 20% of their portfolio in real assets, compared to 19% of European and 17% of Asia Pacific investors.
Real estate equity was the asset class of choice within the broad real asset universe, representing 30% of allocations – down from 31% two years ago and expected to remain constant over the next two years. In contrast, institutional investors are most likely to increase allocations to infrastructure equity, rising from 12% two years ago to 13%, and 14% in two years. Direct investment (46%) is the preferred route to market, followed by multi-asset pooled funds (40%) and single-asset class pooled funds (32%).
Renewable infrastructure dominates investment plans for sustainable real assets, with 44% of investors already having exposure to this asset class planning to boost their weightings. Among institutions with existing exposure to low-carbon, new-build real estate, 30% are looking to allocate more capital.
Looking at investments seeking a positive social impact, 73% of investors picked social infrastructure projects as their preferred option, followed by social housing (68%) and urban regeneration infrastructure projects (62%).
The majority of the institutional investors surveyed (67%) feel responsible for investing sustainably. Corporate values (61%) and risk management (59%) emerged as almost equally important factors for pension funds, and more than 79% of investors favour a fund or strategy with ESG-integrated returns. This preference for a returns-based approach is predominantly found in 90% of investors in North America, followed by 71% of European and 82% of Asian investors. Investments supporting the energy transition are expected to secure the best financial returns, said 56% of respondents, and also most likely to provide the best ESG impact (50%). The majority voted performance track record as the most vital criterion in selecting real assets managers for a sustainable mandate.
Difficulty finding opportunities (53%), transaction costs and valuations (both 50%) are considered the biggest obstacles in increasing allocations to real assets over the next 12 months. 52% of respondents viewed greenwashing as a significant material risk to investment in sustainable real assets, ahead of concerns over valuations (44%). Illiquidity (69%) is the top concern for investing in real assets more generally, whilst valuation risk (57%) is also a big concern, especially for pension funds (61%).
“Real assets are playing a meaningful role in overall portfolios, offering investors a broad menu of options with varying degrees of risk and inflation protection built in,” commented Daniel McHugh, chief investment officer, real assets, Aviva Investors. However, capital pricing models not adequately factoring in climate-related obsolescence in their numbers could pose a material risk for investors, pointed out McHugh. “Investors must be alive of how quickly – and to what extent – obsolescence could accelerate and the potential impact it could have on portfolios,” he added.
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