How Institutional Investors Feel About Impact Investing

An overwhelming majority of institutional and professional investors worldwide (71%) plan to increase their allocation to impact investing solutions over the next three years. This is the key finding of a new Vontobel survey of 193 institutional and professional investors from 21 countries in North America, Europe, and Asia Pacific.

Another finding is that while European investors remain frontrunners in demand for solutions, Asian investors are likely to catch up soon. Yet, more than half of respondents (58%) have only been investing in this category for less than three years.

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More equities, broader diversification

Among survey participants already investing or planning to invest in impact, exchange-traded equities are the most popular asset class at 67 percent. In addition, 56 percent of respondents plan to increase allocations to exchange-traded stocks over the next three years.

Investors also plan to diversify their current allocations across asset classes more broadly over the next three years, with 51 percent opting for infrastructure (invested to date: 39%), 38 percent for real estate (26%), and 23 percent for commodities (7%). More than half of respondents (57%) say they will invest entirely or primarily in active impact strategies.

Europeans lead the way in impact investing

From a geographic perspective, investors from Europe lead the way with 70 percent investing in impact investment solutions. This compares to 56 percent of investors from North America and 57 percent from Asia Pacific. However, the survey results also suggest strong investor interest from the Asia-Pacific region to expand allocations to impact investments. There, 92 percent plan to increase allocations through public markets, and 79 percent through private markets.

One driver among public markets in the Asia Pacific is the expanded definition of fiduciary duty, which includes future assessment of impact investments. This point is cited by 54 percent of investors there compared to 25 percent in Europe and 20 percent in North America. Investment impact also remains at the top of considerations in Europe, with 67 percent of investors planning more allocations through public markets and 72 percent through private markets in the future.

“The challenging market conditions of the past 18 months have impacted asset classes in both public and private markets – including those with a sustainable focus. The survey shows that despite the more challenging times, investors remain committed to impact investing and even plan to increase their allocation over the next couple of years,” said Pascal Dudle, Head of Listed Impact at Vontobel.

“Interestingly, they plan to do so across a much broader range of asset classes across public and private markets. This is a positive indicator that the concept of impact investing is no longer a niche within sustainability, but is now seen as a specific and distinct type of investment.”

Energy transition as a driver

Looking at the drivers behind allocations to impact investing, the energy transition continues to top the list. In fact, 81 percent and 77 percent of investors name decarbonization and the transition to net zero, respectively, as the main goals of their impact investments, with biodiversity also moving up investors’ agendas – more than half of them (56%) favor impact investments with goals focused on biodiversity. Among the most pressing areas, they believe impact investing should address, renewable energy (68%), energy efficiency (58%) and water (43%) top the agenda.

Despite investor tendencies toward environmental goals, they nevertheless also seek impact across the sustainability spectrum. Nearly six in ten survey respondents (58%) want their impact investments to focus on equity and diversity. For investors in Asia Pacific and North America, the strongest preference is for these social concerns, at 66 percent and 63 percent, respectively, with European investors following at 53 percent.

Impact evidence of key importance

Investors continue to face greenwashing when implementing impact investing. Among their key concerns are misleading or exaggerated impact claims (60%), the lack of a clear industry standard/definition for impact managers (49%), and insufficient transparency in reporting (44%). The ability to demonstrate portfolio impact is absolutely critical and must be an integral part of investment firms’ reporting systems, as 82% of investors cite transparency and measurability of impact outcomes as important factors when selecting impact investing managers.

Investors cite several challenges they have encountered when evaluating impact investing strategies that would likely discourage them from taking up these strategies. These include the lack of reliable data, poor transparency of benchmarks/indices, and the wide range of different approaches among asset managers.

“Even though we can see a strong commitment to impact among investors, many are still at the beginning of their impact journey. A key barrier, and a common challenge they cite regardless of location, is the lack of transparency and thus the ability to measure and report the impact of their portfolios. Increased transparency is key to building investor confidence,” concludes Dudle.

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(Featured image by Mathieu Stern via Unsplash)

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First published in INSTITUTIONAL Money.com. A third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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