More than nine-out-of-ten (93%) of global institutional investors actively consider ESG and sustainability in their real assets investment decisions, with 17% considering it a critical factor, according to new research from Aviva Investors, the global asset management business of Aviva plc.

The findings form part of the fifth annual ‘Real Assets Study’ from Aviva Investors, which canvassed views from 500 institutional investors around the world, including pension funds, insurers, global financial institutions and official institutions, together representing more than $3.5 trillion in assets.

The Study also revealed that two-thirds (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%.  The highest allocations are by investors in North America, where almost a quarter have greater than 20% of their portfolio in real assets, compared to 19% of European and 17% of Asia Pacific investors.

Whilst diversification remains the primary driver for investing in real assets according to 57% of respondents, the ability of these strategies to provide inflation-linked income is increasingly driving allocations. Aviva Investors’ research reveals 53% of respondents allocate to real assets for its ability to provide inflation-linked income, versus just 33% three years ago. With half of institutional investors having a net-zero commitment in place, the Study found 28% of respondents allocate to real assets to capture its positive ESG impacts, compared to just 17% three years ago.

“Inflation had an acute impact on the economic and investment landscape in 2022, making it increasingly expensive to hedge against it through traditional asset classes, whilst rising interest rates have eroded returns. The ability of real assets to provide inflation-linked income has woken investors up to the attractiveness of these strategies beyond simply being a diversification play. They are now playing a meaningful role in overall portfolios, offering investors a broad menu of options with varying degrees of risk and inflation protection built in. The Study shows that demand is also being driven by the ability to assess the positive impact of these investments beyond returns, such as contributing to sustainability-related objectives.”

Daniel McHugh, Chief Investment Officer, Real Assets, at Aviva Investors

Aviva Investors’ Real Assets Study found 67% of institutional investors feel they have a responsibility to invest sustainably. Corporate values (61%) and risk management (59%) are both important factors for pension funds. Even so, more than three-quarters (79%) favour a fund or strategy that prioritises financial returns whilst integrating ESG factors. This preference for a returns-based approach holds true for 90% of investors in North America, compared to 71% of European and 82% of Asian investors. Investments supporting the energy transition are expected to secure the best financial returns according to 56% of respondents, as well as being most likely to provide the best ESG impact (50%).

Over the next 12 months, difficulty of finding opportunities (53%), transaction costs, and valuations (both 50%) are considered the greatest barriers to increasing allocations to real assets. Respondents also consider greenwashing the biggest material risk (52%) 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%).

“Whilst concerns about high valuations feature prominently in this year’s responses, just 22% of institutional investors see climate-related obsolescence as the most material risk. Currently, capital pricing models do not adequately capture new factors such as this in their numbers, which carry material risk for investors. That has to change. 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.”

Daniel McHugh, Chief Investment Officer, Real Assets, at Aviva Investors

Looking across the different sectors within real assets, real estate equity is the most popular among investors, representing 30% of allocations. This is down from 31% two years ago and is expected to remain at the same level over the next two years. In contrast, infrastructure equity is gaining traction, with institutional investors most likely to increase allocations to this area, rising from 12% two years ago to 13% today and 14% in two years’ time. Direct investment (46%) is the preferred route to market, followed by multi-asset pooled funds (40%) and single-asset class pooled funds (32%).

“It is clear real assets investors value the different access routes available to them. Gone are the days when allocations to each asset class within real assets would be looked at in isolation. Instead, investors are often looking for a multi-asset and outcome-led approach, which can align with corporate values. With 81% of investors citing performance track record as being the most important criteria in selecting real assets manager for a sustainable mandate, it is hugely important they choose an asset manager able to make relative value calls that also understands the challenges involved in achieving long-term ESG objectives.”

Daniel McHugh, Chief Investment Officer, Real Assets, at Aviva Investors

sustainability Real Assets Investors

Source: Real Assets Investors