Sustainability considerations a factor for nine-out-of-ten real assets investors

Written by Adam Cadle

23/01/2023

More than nine-out-of-ten (93%) of global institutional investors actively consider ESG and sustainability in their real assets investment decisions, with 17% considering it a critical factor, according to new research from Aviva Investors.

The findings form part of the fifth annual Real Assets Study from Aviva Investors, canvassing the views of 500 institutional investors, with insurance companies making up the largest part of the research.

The study also revealed that two-thirds (64%) of institutional investors plan to increase their allocations to real assets over the next two years, with 46% planning to do so by up to 10%. The highest allocations are by investors in North America, where almost a quarter have greater than 20% of their portfolio in real assets, compared to 19% of European and 17% of Asia Pacific investors.

Whilst diversification remains the primary driver for investing in real assets according to 57% of respondents, the ability of these strategies to provide inflation-linked income is increasingly driving allocations. Aviva Investors’ research reveals 53% of respondents allocate to real assets for their ability to provide inflation-linked income, versus just 33% three years ago. With half of the institutional investors having a net-zero commitment in place, the study found 28% of respondents allocate to real assets to capture its positive ESG impacts, compared to just 17% three years ago.

Over the next 12 months, the difficulty of finding opportunities (53%), transaction costs, and valuations (both 50%) are considered the greatest barriers to increasing allocations to real assets. Respondents also consider greenwashing the biggest material risk (52%) to investment in sustainable real assets, ahead of concerns over valuations (44%). Illiquidity (69%) is the top concern for investing in real assets more generally, whilst valuation risk (57%) is also a big concern, especially for pension funds (61%).

Looking across the different sectors within real assets, real estate equity is the most popular among investors, representing 30% of allocations. This is down from 31% two years ago and is expected to remain at the same level over the next two years. In contrast, infrastructure equity is gaining traction, with institutional investors most likely to increase allocations to this area, rising from 12% two years ago to 13% today and 14% in two years’ time. Direct investment (46%) is the preferred route to market, followed by multi-asset pooled funds (40%) and single-asset class pooled funds (32%).

Daniel McHugh, chief investment officer, real assets, at Aviva Investors, said: “It is clear real assets investors value the different access routes available to them. Gone are the days when allocations to each asset class within real assets would be looked at in isolation. Instead, investors are often looking for a multi-asset and outcome-led approach, which can align with corporate values. With 81% of investors citing performance track record as being the most important criteria in selecting real assets manager for a sustainable mandate, it is hugely important they choose an asset manager able to make relative value calls that also understands the challenges involved in achieving long-term ESG objectives.”

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