Stephanie Hukins

Impact investing is now viewed among the key pillars of sustainable investing, alongside integration and positive screening, Schroders Institutional Investor Study 2022 has found.

Schroders’ flagship annual institutional study, first launched in 2017, is an influential bellwether of the investment appetite of investors globally, spanning 770 investors and US$27.5 trillion in assets.

Just under half (48%) of Australian institutional investors, as well as investors globally, said impact investing was their preferred approach to implementing sustainability, a significant increase on 27% a year ago and 25% in 2020. The Study also found that the importance of full ESG integration into the investment process had grown as a focus, further cementing it as the most favoured approach among investors.

Q. What is your preferred approach to implementing sustainable investments?

Growing demand for investment solutions focused on the energy transition was also reflected in the findings. Three-quarters of Australian institutional investors said that new investment opportunities addressing the energy transition would encourage them to invest more into sustainable investments, a significantly higher number than the global (59%) and Asia Pacific (62%) average.

Q. What would encourage you to invest more in sustainable investments?

Sustainable investment performance concerns

At the same time, performance concerns over investing sustainably have ticked up over the past 12 months, with 64% of Australian investors citing this as a challenge compared with 49% a year ago. This is a significant reversal with worries about performance remaining stable in recent years, and likely reflects the more challenged market environment. The Australian result was similar to Asia Pacific (61%) but above the global figure of 53%. Greenwashing, difficulty in measuring and managing risk and cost were also recognised as some of the major obstacles holding investors back from investing sustainably.

Engagement remains a key focus for investors globally with 59% stating that tangible evidence of real world outcomes was the most important component of any active ownership strategy (57% of Australian investors). Specifically, 80% of Australian investors believed governance (e.g. transparency of voting and shareholder resolutions) was the top engagement theme, a result that was significantly higher than Asia Pacific (72%) and global (64%) investors. A focus on human rights and the climate completed the top three in terms of engagement priorities. Natural capital and biodiversity also emerged as a new area of engagement focus for Australian institutional investors in 2022.

Encouragingly, over four in ten Australian investors (41%) said they had committed to reaching net zero by 2050, slightly above the global result of 37%. European investors are leading the field on this point, ahead of those in Latin America, Asia Pacific and North America.

Q. Where are you on your path to net zero?

Stephanie Hukins, Sustainability Investment Director, Australia, commented: “The findings of this year’s Study demonstrate that institutional investors increasingly want to measure, manage and deliver impact. Whilst ESG integration within the investment process is the preferred approach to implementing sustainable investments, impact investing saw the most dramatic increase over the year, rising from 27% of investors to 48%.

“Interestingly, whilst regulatory and industry pressure remain important influences on Australian institutional investors, the desire to better align portfolios to corporate values, and at the same time positively impact society and the planet, have jumped ahead as the two leading reasons driving sustainable investments this year.

“We see from this year’s Study that there is a strong desire from both global and local institutional investors to support the energy transition which has been identified as a key priority for sustainable investing going forward.

“Australian investors, along with their global counterparts, place a high importance on engagement. Schroders’ market-leading Engagement Blueprint^[1], published this year, is setting new standards on active ownership as it maps out our ambitions and how we look to engage with companies to support and drive progress.

Investment outlook

More broadly, investors’ return expectations for the next five years have deteriorated compared with a year ago, compounded by significant concerns over the impact of rising inflation and interest rates, as well as geopolitical uncertainty growing and fears over a global slowdown, as shown below. Inflation was the top concern for Australian investors (34%) followed by rising interest rates (21%) and geopolitical uncertainty (19%). 

Q. Which one worries you the most?

Amid a more challenged outlook, the Study did however find that global investors’ confidence in achieving their returns has remained steady – most likely the result of their scaled back expectations. In Australia, 4% of investors were not confident at all of achieving their return expectations, whilst 91% were either confident, or somewhat confident of achieving return expectations.

Interestingly, concerns over global pandemics have markedly fallen in importance as an issue for investors compared with the previous two years.

Simon Doyle, Schroders CIO and Head of Multi-Asset, Australia, commented: “The misalignment between policy settings, economic outcomes and asset prices continues to influence markets, creating a challenging investment environment. The Study showed that for investors, rising interest rates, inflation and the threat of global conflict, were key sources of concern.

The Survey results show that institutional investors have reduced their allocations to equities, which is consistent with our own portfolio positioning. For the year ahead Australian investors anticipate a slight upweighting to equities, with stable allocations to other asset classes. In contrast, we remain cautious as while equity prices have responded to higher interest rates, earnings and earnings expectations haven’t. The risk of recession is significant as central banks raise rates to rein in demand and curtail inflation. 

As an active manager, Schroders is focused on managing through the current market challenges on behalf of our clients in Australia and around the world.

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[1] https://www.schroders.com/en/media-relations/newsroom/all_news_releases/schroders-unveils-engagement-blueprint-to-highlight-global-active-ownership-priorities/

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