Global institutional investors have significantly raised their ambitions to implement net zero commitments across portfolios over the last 12 months, whilst being increasingly aware of the challenges in meeting these targets, according to the latest edition of the Aviva Investors Real Assets Study.
The annual survey from Aviva Investors, the asset management arm of Aviva plc (‘Aviva’), is based on responses from over 1,100 decision-makers at global insurers and pension funds, which together represent over €2 trillion of assets under management.
The latest research found that 52 per cent of insurers and 50 percent per cent of pension funds have committed to achieving net zero in their portfolios before 2050, an overall increase of 12 per cent over the last 12 months. Of those committed to achieving net zero by 2050, European insurers (53 per cent) lead the way versus their North American and Asian counterparts (both 51 per cent), whilst North American pension funds (60 per cent) are significantly ahead of their counterparts in Europe (47 per cent) and Asia (41 per cent). 67 per cent of all pension funds surveyed now have some form of net zero commitments in place, compared to just 47 per cent last year.
Reflecting the desire for greater transparency on the integration of ESG factors into real assets strategies, 55 per cent of pension funds view asset managers’ ability to integrate ESG factors into the investment process as being critical, whilst 50 per cent of insurers feel that the ability of managers to quantify ESG risk and impact is most important.
More broadly, appetite from institutional investors for Real Assets has continued to remain high, with 82 per cent of insurers and 77 percent of pension funds globally stating their intention to increase or maintain allocations over the next 12 months.
Daniel McHugh, Chief Investment Officer, Real Assets, at Aviva Investors, said “Our latest Study reveals the pace at which Real Assets is evolving as an asset class on climate and ESG issues, and how critical those considerations are seen to investment decision-making. This includes a fundamental shift towards measuring and quantifying those factors, rather than paying lip service to them through pledges and policy alignment. Partly that is as a result of better understanding of the elements involved but also as end-savers scrutinise more for potential greenwashing practices. Encouragingly, Real Assets are often favoured by investors for integrating these themes into portfolios, as their positive impact is typically clearer to isolate and quantify. Moreover, the attraction of Real Assets has been further supported by their resilience over the past 18 months. Despite the exceptional challenges facing all markets, Real Assets have delivered robust income streams, underpinned by consistent returns and lower volatility relative to other asset classes, bringing further recognition of the all-round qualities these strategies can provide to a portfolio beyond being simply a diversification play.”
When asked which climate focused KPIs were most important to their organisation, ‘physical climate risk’ was cited by insurers (35 per cent) and pension funds (37 per cent), followed by ‘carbon footprint’ (32 per cent insurers and 36 per cent pension funds). Respondents were also vocal about the challenges faced in reaching these goals, with over 80 per cent of respondents (insurers 87 per cent and pension funds 85 per cent) rating the environmental pressures of investing into new infrastructure as either very or slightly discouraging.
Daniel McHugh added “Sixty per cent of UK emissions are attributable to the built environment, with the carbon intensity of real assets being at its highest during the construction phase, so it’s little surprise environmental pressures are seen as a challenge for investing in new projects. This makes retrofitting existing buildings all the more important. The key is finding a balance between bringing these assets up to today’s low carbon, energy-efficient standards, and creating new assets which, over the long-term, bring net positive carbon benefits to portfolios. Demonstrating how underperforming assets can be greened over time and the value of doing so has been a focus of our Real Assets business for some time and is a critical element of our newly-launched Climate Transition Real Assets Fund.”
The impact of Covid-19
As the vaccination roll-out unwinds following the global pandemic, the influence of Covid-19 on investor attitudes remains significant. Similar to the 2020 Study, respondents in 2021 still felt the longer-term trend of working from home will provide greatest opportunity for real assets investing (43 per cent of insurers and 41 per cent of pension funds). This was closely followed by growth in requirements for datacentre infrastructure (41 per cent of insurers, 39 per cent of pension funds), alongside changes to travel and commuting (40 per cent of insurers and 41 per cent pension funds) and growth and change in the logistics sector (40 per cent of both insurers and pension funds).
The Study also reveals a continued increase in focus on social responsibility by investors, with employment and skills (37 per cent of insurers and 36 per cent of pensions funds) the most important ESG factor in Real Assets investing; health and wellbeing (35 per cent of insurers, 41 per cent of pension funds) and natural capital and biodiversity (36 per cent of insurers, 34 per cent of pension funds) also seen as important.
Other highlights from the Real Assets Study 2021 include:
- Regulation continues to be the biggest hurdle to real assets allocation for insurers (38 per cent), whilst pension funds are most concerned about illiquidity (37 per cent)
- Reflecting the move away from processes towards quality of reporting to investors, 46 per cent of respondents cited transparent reporting and target-setting on environmental factors as a very encouraging factor when it comes to improving environmental credentials
- For insurers (51 per cent), real estate equity is the real asset they are most likely to increase investment in, whilst for pension funds, real estate long income (49 per cent) and real estate debt (49 per cent) were the top picks