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US institutional investors seek opportunities in private assets and sustainable investing: Schroders

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US institutional investors are increasingly looking to private assets opportunities to invest sustainably, according to global asset manager Schroders, which today released the US findings of its Institutional Investor Study.

The annual study, which spans 200 North American institutional investors, (26 per cent of total 770 global respondents) including 117 in the US representing over USD7 trillion in US assets, gauged institutional investor sentiment on the key trends and drivers impacting the investment landscape, and how they are managing their portfolios accordingly.

Private assets to take bigger role in portfolios and sustainable strategies

Nearly a third (32 per cent) of US institutional investors plan to increase their private asset allocations over the next two years, primarily due to diversification benefits, lower volatility and the potential to garner higher returns than the public markets. Investors had the highest interest in increasing allocation to infrastructure investments, with 42 per cent planning to do so over the next 12 months.

Investors also see private assets as an opportunity to incorporate sustainable and impact investments into their strategy. When asked about some of the key investment themes investors want to allocate to through private assets, 49 per cent of participants listed the technological revolution, followed by 39 per cent seeking to proactively allocate to private investments tied to the energy transition, a theme many believe will spur investment in innovation, creating significant investment opportunities.

Active ownership and engagement, along with impact investing, also ranked highly as preferred private assets investment approaches when it comes to investing in sustainable and impact strategies, and 23 per cent of investors noted that actively engaging with portfolio companies and borrowers to ensure achievement of impact targets is the best way to ensure positive and measurable impact in private assets investing.

That said, obstacles remain, including the limited track record of both financial and sustainability performance of funds and mandates (which 63 per cent cited as an obstacle), and weak sustainability and impact measurement practices of asset managers and investee companies (51 per cent).

“Amid continued volatility and geopolitical uncertainty, investors are looking for opportunities for diversification and returns that align with trends shaping global markets,” says Nick Thompson, Head of Private Asset Sales, North America. “Private assets investing can allow them access to companies and industries at the forefront of major developments, such as the energy transition and technological innovation. Asset classes like private equity and infrastructure investing can offer both high returns and sustainable opportunities.”

Investors harnessing thematic trends through sustainable investing

Institutional investors are prioritising investments with companies that are leaders and aligned with the energy transition. When asked for their preferred approach to investing sustainably, US respondents highlighted thematic (69 per cent, compared to 61 per cent globally) as their top choice. This data illustrates a shift from simply considering ESG as a risk mitigation tool, to identifying and targeting thematic sustainability opportunities arising from macroeconomic shifts.

Despite ongoing arguments about the role of ESG in portfolios, US investors continue to see value. Seventy-four per cent of US investors said that a top three reason for investing in sustainability and impact strategies was the belief that doing so is required to achieve long-term financial returns. Sixty-six per cent stated that they are motivated by the appetite to diversify into new sectors (e.g. nature-based solutions, green hydrogen, the Just Transition, etc), further emphasising investors’ thematic focus.

When it comes to the issues that investors see as most important for them in terms of active ownership, corporate governance was the top theme for all regions followed by human capital management (53 per cent) and human rights (53 per cent) for North American investors. US investors understand the importance of issues around financial inequalities, social and racial disparities and the challenges faced by workers, a topic that our Human Capital Management Research, in collaboration with Saïd Business School, University of Oxford and the California Public Employees’ Retirement System (CalPERS) has addressed. 

Marina Severinovsky, Head of Sustainability, North America says: “As the world grapples with regime shift and the trends of deglobalization, decarbonisation and demographics on the investment landscape, sustainability themes are becoming increasingly important, creating new opportunities for companies and investments that provide sustainable products and services. As a result, investors are looking to identify and allocate capital to these emerging sustainable investment themes. They recognise that they have the opportunity to drive change on real issues that can simultaneously lead to positive portfolio outcomes, which is apparent in investors’ current appetite for thematic investing.”

Inflation, interest rates and geopolitical concerns remain

US investors were split in their confidence level of achieving their return expectations over the next two years: 54 per cent were somewhat confident, while 45 per cent were confident or very confident (4 per cent said they are not confident at all).

Affecting their view are several factors that they believe will impact their portfolios over the next year, including geopolitical uncertainty (54 per cent), tapering of monetary policy (45 per cent) and rising inflation (44 per cent).

Adam Farstrup, Head of Multi-Asset, Americas, adds: “We’re in a whole new age of investing as real rates and inflation pressures remain higher for longer. Further, decarbonisation, deglobalisation and demographics – the factors that make up what we call “The 3D Reset” – will continue to have massive long-term implications for the global economy and sustain these trends. Investors will need to understand the impact of these forces and adapt their investment strategy in order to capitalise on opportunities and avoid risks associated with this rapidly changing landscape.”

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