Simon England-Brammer

According to Nuveen’s inaugural global institutional investor survey, the ongoing global pandemic, the shift to investing in alternatives and ESG integration are the most powerful themes shaping investment decisions in the Asia Pacific region in 2021. Of those surveyed, 52% of respondents in Asia Pacific believed the pandemic would be the greatest driver of change to asset allocation and investment strategy in the coming year. Of Asia Pacific respondents, 44% also said they planned to a strategic shift away from public to private markets in 2021 and 65% said that increasing active engagement with companies they invest in was the most important way to influence ESG factors.

“With simultaneous crises in global public health as well as economies and markets worldwide, 2020 offered us an extraordinary opportunity to assess the practices and attitudes of major institutional investors in managing both portfolios and day-to-day operations,” said Simon England-Brammer, Senior Managing Director, Head of Distribution, Asia Pacific.

Perhaps unsurprisingly the pandemic was a strong driver shaping investment decisions for the year ahead, but additionally respondents in Asia Pacific pointed to alternatives and ESG as playing a significant role in their portfolio construction for 2021.”

The inaugural Nuveen Global Institutional Investor Study surveyed a total of 700 investors and consultants around the globe, including 158 across Asia Pacific. All institutional investors represent organisations with at least US$500 million in assets.

The research shows 81% are invested in alternatives, however significant barriers remain such as complexity of deal (72%), liquidity provision (69%) and investment limits (66%) respectively responding that liquidity provisions and investment limits are the greatest barriers.

Meanwhile, when it comes to ESG, 62% of respondents agreed it is about fully integrating material ESG factors into investment decision-making. However, only 31% believed that ESG factors are valid drivers of alpha and 28% responded that they thought ESG was a trend rather than a core, long-term investment strategy.

“More and more, market research is helping make the case that ‘responsible investing’ can deliver competitive returns, but clearly there is a need to put more effort into validating the investment proposition along with the positive impact,” said Amy O’Brien, Global Head of Responsible Investing.   “The marketplace would benefit from more attention and focused effort on helping prospective ESG investors resolve concerns and clarify objectives for their stakeholders and themselves.”

Despite some of the clear challenges those surveyed expressed about investing in alternatives and ESG integration, their responses also indicated that their organisations have clear strategies for tackling these areas.

For instance, 67% of respondents in Asia Pacific said they were likely to expand their internal team, such as hiring, education, etc. to overcome the challenge of investing in alternatives and 53% seeking new strategic partnerships for co-investment.

Similarly, when it comes to ESG, respondents were committed to problem solving, with 44% said they would prioritise ESG as a tool for positive impact (e.g. sustainability, social good, etc.) and 45% indicated they want to collaborate with peers to shape best practices.”

Simon continues: “Whether navigating the challenges of a global pandemic, developing new approaches to alternatives amid a strategic shift to private markets or turning ESG desires into reality, asset owners and consultants are navigating complex, high-stakes decisions that are defining the future of investing.

“This survey has allowed us to explore these critical topics in order to help us better understand the beliefs and mindsets that are leading to action in each of these topics and to better help our clients achieve their goals with clarity and conviction.”

Read the global research findings.

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Responsible investment is no longer considered a niche approach to investing.

There is a growing acceptance of responsible investment (RI) by millennials, women, affluent investors and institutions as the concept moves from being considered a niche and product-specific approach to one that has a proven track record of contributing to portfolio performance leading to a broader appeal among global institutional and retail investors, according to Nuveen’s TIAA Investments.

Amy O’Brien, Managing Director and Head of Responsible Investment at TIAA Investments, an affiliate of Nuveen, who presented to institutional investors at the Australian Institute of Superannuation Trustees CIO Forum, said the environmental, social and governance (ESG) ecosystem had expanded significantly and enabled growth in adoption of RI approaches.

“Responsible investment is no longer considered a niche approach to investing. It’s increasingly being seen as a mainstream approach, commanding a place as a prominent and recognised discipline that adds value to the investment process,” Ms. O’Brien said.

“Globally, approximately 300 policy tools or market initiatives covering the relationship between finance and ESG issues exist, half of which were developed between 2013 and 2016.

“We have seen greater emphasis on issues of materiality of corporate sustainability and more ESG-related data is available to investors than ever before. This helps inform new types of investment approaches, fulfill diverse motivations and more differentiated product.”

RI is an investment discipline that incorporates ESG factors into investment analysis, portfolio construction and ongoing monitoring across asset classes with the objective of enhancing long-term performance, managing risk and aligning client values.

Investor demand is the key driver

Ms. O’Brien said investor demand, especially from institutional investors, has been a key driver of RI growth.

“Global themes driving client demand in the RI market include climate change, gender equality, conflict risk, and impact measurements.

“These themes have led institutional investors to increasingly focus both on the materiality of ESG factors as well as outcome metrics aligned to the UN Sustainable Development Goals,” she added.

About 43 per cent of assets professionally managed in Australia in 2015, or A$581 billion, is managed through broad responsible investments that integrate ESG factors into investment decisions, according to the latest data from the Responsible Investment Association Australasia (RIAA).

Knowledge gap means missed opportunities

Ms. O’Brien said that while interest in RI is strong, many investors remained unaware of the availability of best-in-class products. A 2016 TIAA Investments survey in the U.S. found that one in four affluent investors and advisers said RI options were very limited or that the category lacked quality choices. More notably, 51 per cent of U.S. financial advisers said RI did not provide the same rate of return as other investment strategies, while 57 per cent of investors believed RI offered a lower rate of return than other strategies.

“The fact is that responsible investing strategies vary widely in their intent and approach. As an industry, we need to do a better job of helping investors understand how these strategies work and that it’s possible to build a well-diversified ESG portfolio,” Ms. O’Brien said.

She added that incorporating ESG criteria in individual security selection can, in fact, deliver market competitive returns while potentially reducing risk.

“Our analysis found little to no difference in ESG index returns compared to those of broad market benchmarks. That means a responsible investment approach has achieved comparable performance over the long term without additional risk, despite using a smaller universe of securities in order to meet ESG criteria,” she said.

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