LSEG Insights

Sustainable Investment: asset owner transition on course despite choppier waters

Lee Clements

Head of Applied SI, Global Investment Research
  • Annual survey of institutional investors reveals sentiment to a wider range of assets and fund types 
  • Sustainable investment assets tended to underperform in 2022, as energy stocks surged after the invasion of Ukraine 
  • Asset owners are adding resource to meet sustainability needs  

Sustainable investment has been under the microscope. Political scrutiny, financial underperformance and accusations of greenwashing have all created headwinds that have been reflected in the headline figures of our latest Sustainable Investment Asset Owner survey. But, looking beyond those headlines, we can see a maturing sustainable investment market which is moving beyond challenges of standards, data and resource to become an increasingly robust part of the standard approach to investment.

Sustainable investment headwinds

Arguably of primary concern for investors, many sustainable investment strategies posted poor performance in 2022. Again, enthusiasm for the theme in 2021 had helped to push up valuations of in-vogue environmental markets stocks, many of which fell sharply in the risk-off macroeconomic conditions of 2022. For example, our FTSE Environmental Opportunities All-Share index performed 23.1% ahead of the market in calendar 2020 and 2% ahead in 2021, before performing 6.2% behind the market in 2022.  

Some may argue that sustainable investment has been a victim of its own success. The flood of capital pouring into sustainable investments in 2020-21, alongside strong investment performance, lead to a diverse, and many cases confusing, range of new sustainable investment products. Regulators have taken action to rein in such greenwashing, encourage standards to help define what sustainable activities are and promote disclosure. Many investors – from sophisticated professionals to enthusiastic retail – continue to struggle to differentiate between sustainable investment strategies, interpret data, stay on top of evolving regulation and avoid the risk of reputational damage.

The case for cautious optimism

There are reasons to believe, however, that the worse effects of some of these factors might be behind us.

In the US, President Biden’s Inflation Reduction Act is encouraging tens of billions of dollars of capital investment in clean technologies.[1]

Furthermore, according to our data, a dip in sustainable investment in the US will have a limited impact on the absolute size of the current global market;  North American sustainable investment funds only account for 15% of the global total.[2]

Meanwhile, the sector’s investment performance has reversed, with many of the worst underperformers in 2022 roaring back in 2023.[3] Fund flows also support the view that the decline in interest in sustainable investment has been oversold. Fund data from Lipper show inflows into sustainable investment bond and equity funds in 2022 of $151bn, down 67% compared with 2021 – but that’s in the context of overall market bond and equity flows which saw $435bn of outflows in 2022.

A maturing market for sustainable investment

We also found that, behind the scenes, many of challenges that investors faced regarding sustainable investing are beginning to ease.

Concerns about the availability of ESG data persist – with half of respondents citing the issue as a barrier, the same figure as in 2022. But other worries are abating. For example, only 37% of survey respondents said that the lack of standardisation of ESG data, scores and ratings posed a barrier to greater adoption of sustainable investment, down from 59% two years ago. Only 25% of respondents expressed concerns about the quality of corporate disclosures, down from 45% two years ago. And only 17% cited limited historical data – down half from 2021.

Other barriers are continuing to decline in terms of their salience. Just 16% of asset owners complain of a lack of resources when they are considering adopting sustainable investment, down from 29% in 2021. Fewer than one in 10 (8%) asset owners consider questions about how to determine the best sustainable investment strategies for their portfolio to be a barrier, down from 26% in 2021.

These responses reflect the ongoing maturation of the sustainable investment market. Make no mistake: investors continue to grapple with issues around data, disclosures and sustainable investment methodologies. But discussions around how best to implement sustainable investment strategies are growing.

Passive is rising

The survey also shows the growth of passive sustainable investment strategies which are, for the first time, as widely implemented as active ones. It finds that the same proportion of asset owners (73%) have applied sustainable investment considerations to their passive as to their active strategies. Lower cost tends to be the main motivation for investors to favour passive strategies. However, their use of transparent, rules-based methodologies can help to allay concerns over greenwashing.

Financing the green transition

Another noteworthy finding from the survey was the increase in the percentage of investors applying sustainable investment considerations to their infrastructure portfolios. For investors in EMEA, 59% of them do so, up from 42% last year. Globally, fixed income remains the top asset class for sustainable investment allocations. It is, arguably, by providing debt and investing in infrastructure that investors will have the biggest impact in terms of delivering the green transition.

This echoes data we are seeing elsewhere, such as in the green bond market – with the first two quarters of 2023 seeing record levels of issuance. Increasingly, investors are committing capital to projects and companies that are delivering the infrastructure and technologies relevant to sustainability challenges. Similarly, investors are putting their own investment infrastructure, processes and governance in place to invest in line with sustainability considerations.

[1] Republican districts dominate US clean technology investment boom, Financial Times, 13 August 2023

[2] LSEG Lipper responsible investment ETF & mutual fund aum (across asset classes) domiciled in North America, end June 2023 

[3] Sustainable Investment Insights | LSEG

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