Lee Clements
To paraphrase Mark Twain, reports of the decline of sustainable investment are greatly exaggerated. Despite shifting political views on the climate transition and a deregulatory push in Europe and the US, our latest annual survey finds continuing and consistent adoption of sustainable investment by asset owners around the world.
Indeed, our survey – which polled the views of 415 pension funds – found growing concern among investors about climate risk and an ongoing focus on diversity equity and inclusion.
But it also revealed a shift from principles to pragmatism, and more hard-headed attitudes among asset owners towards sustainable investment in practice. This, we believe, offers a road map to how the sustainable investment industry builds from its current plateau.
In a steady state
FTSE Russell has been asking asset owners how they are thinking about and implementing sustainable investment since 2018. Our survey ranges from big picture questions, such as their sustainable investment priorities and considerations, to the specifics of their approaches by asset class.
On the former, the survey shows adoption of sustainable investment broadly stable since 2023. This year, 73% of respondents said they are implementing one or more forms of sustainability consideration in their investment strategies – a figure that has hardly changed over the last three years.
Currently implementing one or more forms of sustainability considerations in investment strategy
This finding is in line with data on capital flows in and out of sustainable investment funds, as tracked by LSEG Lipper, and from conversations we are having with our asset owner clients.
We believe it is noteworthy that, despite political headwinds, and the sometimes volatile performance of important parts of the sustainable investment fund universe since the full-scale invasion of Ukraine in 2022, a large majority of asset owners continue to pursue sustainable investment strategies.
Sustainability concerns are rising up the agenda
Asset owners are operating in an environment where global policy to support the low-carbon transition has in some markets reversed. Despite the intensifying impacts and costs of extreme weather, governments around the world are balancing climate policy with cost-of-living pressures and related debate around net zero goals.
Investors, however, have grown more, not less, concerned about climate change over the last 12 months. This year, 85% of asset owners were in the ‘most concerned’ category for climate risk – rating their concern about its investment impact as seven or above out of ten – up from just 50% in 2023 and 76% last year.
Investors are also voicing concerns with other sustainability issues, with more than a quarter (28%) stating that diversity and inclusion is a “priority focus”. And biodiversity and natural capital are a priority concern for a fifth of investors.
Integrating sustainability considerations
The survey also found that, increasingly, asset owners are incorporating sustainability risks into broader investment processes. Four in five of those surveyed said that they are now either considering sustainability or the climate (or using related indices) in their strategic asset allocation process. This figure has risen from just 28% in 2021 and illustrates both the importance investors are ascribing to sustainability factors and how they are mainstreaming them into investment practice.
But beyond this high-level consensus, there is still considerable diversity when it comes to the strategies investors are using to express their views on sustainability. Thematic ESG investing and ESG integration, two mainstays of sustainable investment, continue to be the leading sustainable investment approaches applied by asset owners. While exclusions and divestment continue to be widely practised, investors are also taking a more nuanced approach to decarbonising their portfolios, showing greater willingness to engage with companies to support them on a transition towards low-carbon business models.
Top three and bottom three sustainability implementation considerations
Similarly, asset owners are applying sustainability considerations most widely in listed equity and fixed income, although alternatives – real estate, infrastructure and private equity – are catching up fast, as investors build up their experience in these asset classes.
Currently implementing sustainability considerations by asset class
Motivations evolve
One clear evolution we are seeing is in the motivations that are driving investors to pursue sustainable investment. Here, pragmatism is clearly edging out principles. Investors believe sustainable investment will help them achieve better risk-adjusted performance (56%), manage long-term investment risk (54%) or capture returns from sustainable investment opportunities (54%). Barely more than a third cite “societal good” as a motivation.
Top three and bottom three motivations for implementing sustainable investment considerations in investment strategy
Next phase of mass market growth
Will we see the sustainable investment market return to the growth rate we saw through most of the 2010s and the early 2020s?
First, it is important to note that there is still a sizeable untapped opportunity. Nearly one in four (23%) survey respondents said they are considering applying sustainability considerations to their investments. Of the 73% who are already doing so, they apply them to an average of 41% of their assets. This means that there is still considerable scope for growth.
In the survey, we also asked investors what barriers they perceive as preventing them from adopting sustainable investment or from applying it to more of their assets. Longstanding issues, such as concerns around greenwashing and inadequate ESG data, persist. However, newer issues around financial performance and additional risk were also cited by one in four respondents.
Key barriers to adoption of sustainable investment
Applying rigour
We believe that the survey has illustrated the concerns and motivations that are likely to be key to the next stage of growth in sustainable investment. A more favourable geopolitical environment will be important, as will the real-economy policies that encourage a shift to a more sustainable economy. But asset owners clearly want products and strategies that are both financially rigorous and which emphasise pragmatism .
The headwinds that sustainable investment has faced over the last few years have forced investors and providers alike to take a more hard-headed approach to adopting and implementing sustainable investment. This promises to further support the market, even as global geopolitics evolve.
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