How Institutional Investors Are Approaching Sustainable Investing

As asset owners, asset managers, and policy makers gather in Dubai for the 28th United Nations Climate Change Conference (COP 28) that begins this week, the focus on environmental, social, and governance (ESG) and sustainable investments has never been more prominent.

Institutional investors are, by and large, pressing on with efforts to incorporate ESG considerations into the heart of their investment processes. Applying it to a wide range of asset classes and pushing for tangible impacts and standard ways of measuring performance, according to new research from Natixis Investment Managers.

The research identified seven key trends in ESG and sustainability through an in-depth survey of pension funds, insurers, sovereign wealth funds, endowments and foundations. These trends, the asset manager said, were influencing how major asset allocators were approaching these issues and were likely to continue to shape the industry in 2024.

Sustainability is Mainstream

ESG analysis is no longer a separate process, Natixis found; it has become integral to investment processes, as reported by 70% of institutional investors.

It is about more than just identifying risks: more than three in five respondents (62%) believe there is alpha to be realized in ESG investing. The adoption of various strategies, including integration (49%), negative screens (31%), and impact investments (29%), demonstrates a holistic approach.

Demand for ESG and sustainable investing products and services is being driven by individual investors, according to Natixis.

A survey of 8,550 investors in 27 countries conducted by the Natixis Center for Investor Insight found that 70% would opt for a fund with a better carbon footprint. This demand has prompted 87% of fund selectors at leading private wealth managers globally to include ESG investments in their offerings.

In addition, for many investors, considering ESG factors goes far beyond their equity portfolios alone.

Institutional investors are diversifying ESG across traditional and private markets. While equities (71%) remain the primary focus, 41% are pursuing ESG goals in bonds, and 32% are venturing into infrastructure investments. The latter is driven by investments into renewable energy assets.

Private assets, including private equity (41%) and private debt (24%), are also subject to ESG scrutiny, Natixis found.

Go Woke, Don’t Go Broke

ESG issues — and climate change in particular — are hot issues in the US and promise to be key to the next presidential election.

However, while 57% of institutional investors told Natixis that the politicization of ESG issues has altered how they invested, European and Asian investors were more likely to say this than North American institutions.

However, as Natixis pointed out, in areas such as Europe ESG-related policies “generally encourage, and in some cases require, institutional investors to adopt ESG”. This has created a “tailwind” for sustainable investing in these regions.

And despite the anti-ESG headlines in some parts of the US, Natixis’ report highlighted that there were “significant regional and philosophic differences” across the country.

“When it comes down to it, 83% of institutions globally are implementing some form of ESG [or] sustainable strategy in their portfolios,” the asset manager’s report stated. “While the level of adoption is greatest in Europe, Middle East, and Africa (92%), there is still a hefty two-thirds majority of institutions implementing some form of ESG in North America.”

Standardization is helping to facilitate adoption of ESG and sustainable investing. Nearly three quarters (73%) of institutions agree that standardization is making it easier to adopt ESG practices.

ESG was also going far beyond environmental and climate issues, Natixis reported. Diversity, equity and inclusion (DE&I) factors are gaining prominence, with 72% of institutions considering or implementing measures internally. Nearly half (48%) are increasingly focusing on DE&I factors in their investments, and 34% exclude companies with poor DE&I performance from their portfolios.

This increased adoption and the breadth of take-up appears to reflect a recognition that, not only can institutions make money from sustainability strategies, but they can also recognize other benefits. These include aligning their assets with organizational values (48%) and influencing corporate behavior (27%).

Regardless of the outcomes of COP 28, it is evident that ESG is no longer a niche but a fundamental aspect of the global investment landscape. The growing demand from individual investors further cements the long-term trajectory of sustainable investing as a core pillar of investment strategies.