Sustainable Investing: Can Institutional Investors Have Their Cake and Eat It Too?

Written by: Karrie Van Belle | AGF

Sustainable investing continues to gain traction with institutional investors, but not just because they want to do their part for the environment and well-being of society, says a new study from Coalition Greenwich, commissioned by AGF.

While doing good is a large part of the equation for wanting to integrate sustainability criteria into their investment processes, increasingly important is the growing belief that doing so can enhance long-term portfolio performance as well.   

In the study – which targeted corporate pensions, public pensions, endowments and foundations across North America and Europe – two-thirds (66%) indicated that they expect the returns of their sustainable equity holdings to match or beat benchmarks to which they are often compared, while 62% said the same about their sustainable fixed income holdings and 52% have similar expectations about their sustainable private market investments.

Granted, the opinion that sustainable investing need not diminish long-term portfolio returns is more of a motivating force in North America, where performance ranks as the clear number one reason for asset owners to adopt sustainable investments. This is in stark contrast to asset owners in Europe, who equally believe that performance returns of sustainable investments can meet or beat benchmarks yet are more likely to adopt them because of a desire to combat climate change than they are because of performance.  

Still, returns aren’t the only portfolio benefit(s) that some respondents expect from their sustainable investments. For instance, 13% believe their sustainable equity holdings may provide uncorrelated or differentiated performance relative to other portfolio holdings and 12% believe that their sustainable equity holdings could reduce portfolio risk that is related to environmental, social and governance (ESG) factors.

It’s given these prevailing attitudes that many of the polled asset owners said they have plans to grow their exposure to sustainable investments significantly in the coming years. In fact, while five years ago, less than 5% had fully integrated sustainable investments across their portfolio, that number is expected to jump to 39% five years from now.

Moreover, many respondents say they continue to allocate more money towards thematic strategies that invest in specific ESG issues or technologies. This is especially true in Europe where 84% said they increased their allocation to sustainable themes over the past two years, and, to a lesser extent, in North America where 53% upped their exposure to these types of investments.  

Among the themes that resonate most with those surveyed, energy transition takes top billing, then water services and climate adaptation,followed bydiversity and inclusion.

Ultimately, the research from Coalition Greenwich makes it very clear that sustainable investing has gained widespread acceptance with institutional investors, many of whom are now motivated by the desire to effect environmental and social change as well as the potential to enhance the performance of their portfolios.

Thank you to Coalition Greenwich for the terrific partnership and to the institutions that took the time to share their valuable insights. Research of this nature is integral to our learning process at AGF and further informs how we evolve to meet the goals and expectations of our client base.  

To learn more about the evolution of sustainable investing and the role of thematic strategies for investors seeking to increase the impact of their portfolios, click to download the full report – Emerging Trends in Sustainable Investing: Best Practices and Wildcards for Institutions

1 Source: Coalition Greenwich 2023 Sustainable Investing Study, September 2023.

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