While equities will remain a dominant feature of sustainable investment portfolios, multi-asset and alternative strategies are expected to gain ground in the coming years. A new survey conducted among European investors shows that they expect their allocation to equities will decrease by two percent over the next five years, while their allocation to multi-asset and alternative funds will rise by two percent.
Although investments with an environmental concern continue to be top investor allocations when it comes to ESG, the survey conducted by J.P. Morgan Asset Management, or JPMAM also found that investor appetite for social investments, as per the ‘S’ in ESG, is increasing.
The JPMAM Future Focus Survey reveals that European investment advisers are exploring new avenues for sustainable investing opportunities. But asset allocation drivers are changing, and so are the ways investors are embracing sustainability themes.
Looking beyond traditional methods
This shift towards multi-asset and alternative funds mirrors a broader trend, JPMAM said, as investors look beyond traditional methods of generating returns, but it is also enabling the injection of an additional sustainable element to portfolios. An allocation to alternatives, including private assets, such as real estate, infrastructure, and forestry, can help investors navigate the transformational shift we are seeing across global industries and sectors, it said.
JPMAM surveyed a range of European investment advisers and found they now broadly recognised that a shift of their investments towards ESG products does not have to be a trade-off in terms of returns. Less than 7 percent of investors are investing only in non-sustainable products, it found..
“Our JPMAM Future Focus Survey demonstrates that many investors understand there doesn’t have to be a trade-off,” said Jennifer Wu (photo), global head of sustainable investing. “Rather, by analysing the financial impact of ESG factors we can identify new opportunities while managing risks that could negatively affect portfolio returns.”
‘Social’ increasingly prioritised
When looking at how the Environmental, Social and Governance - ESG - priorities of European investment advisers are changing, the findings showed that a traditional focus on the environment is evolving to increasingly prioritise social issues, led by accumulating evidence on the financial materiality of these factors, JPMAM said.
Understanding environmental challenges and addressing them through portfolio decision-making has become common among European investment advisers to date. When asked further about what is driving asset allocation decisions, the survey found that client demand and aligning investments with their personal beliefs, were the most popular answers.
Sense of urgency
The third (28 per cent) most cited reason was end-clients wanting to make a positive impact with a sense of urgency. Importantly, more than a quarter (27 per cent) of the investment advisers said they were driven by potentially improved risk-adjusted returns. The respondents (22 per cent) also identified ‘accessing companies that could create long-term value’ as an important driver.
When it comes to regional allocations, ESG investors are looking further afield for future opportunities. While ESG allocations towards US equities looks set to remain constant over the next five years, respondents say they are 7 per cent less likely to find opportunities in Europe (ex-UK). The survey also made it clear that Emerging Markets, including China, attract the most interest from European investment advisers over the coming years. Our survey revealed a seismic shift in portfolio allocation towards Emerging Markets, with 40 per cent of respondents showing interest in the area in five years’ time (26 per cent plan to allocate over the next year).
Change is coming
JPMAM asked respondents how they plan to use various investment vehicles in the short term - over the next 12 months - versus the medium term - the next five years. The survey showed that change is coming. Over the course of the next 12 months, 50 per cent of advisers will increase their use of active mutual funds for ESG exposure: this is set to rise by 8 per cent over the next five years. The survey also showed that 51 per cent of investment advisers plan to increase their use of ETFs to gain exposure to ESG opportunities, compared to 43 per cent over the next year.
In terms of hurdles, the survey shone a spotlight on one significant hurdle frustrating efforts around sustainable investing. There was almost universal acknowledgment that data is insufficiently meaningful, standardised or available. Almost half (45 per cent) of respondents stated that end-investors were unsure about where to source the best information, with the same number of respondents confused about which metrics to factor into investment decisions.
“The sustainable investing market is going through a transformative period, where there is a better appreciation of what ESG investing can and cannot do,” said Wu. “And with COP27 around the corner, there is an opportunity for countries to showcase how they intend to achieve their net zero goals.”
Opportunities for future ESG investments by asset class
