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ESG Investing / Asset Management
Investors to boost impact investment allocations
Energy transition driving interest, greater transparency key to building trust, confidence
The Asset 11 Sep 2023

A significant majority (71%) of global institutional and professional investors are planning to increase their allocations to impact investing solutions over the next three years. While European investors continue to lead in demand for solutions, investors in Asia are planning to catch up quickly, according to a recent survey.

Of respondents who already invest in impact, or are poised to do so, listed equity is the most popular route with 67% currently using this asset class; and, furthermore, 56% are also planning to increase allocations to listed equity over the next three years, finds the Vontobel survey. The study assessed the views of nearly 200 institutional and professional investors across Europe, North America and Asia-Pacific to understand their current and future impact investing allocations.

Investors are also planning to broaden the range of asset classes they use in the next three years from current allocations, with 51% choosing infrastructure (up from 39%); 38% choosing real estate (up from 26%) and 23% choosing commodities (up from 7%). More than half (57%) say they allocate entirely or mostly to active impact strategies.

Looking at allocations to impact investment solutions from a geographic perspective, Europe is currently leading with 70% of those surveyed in the region investing in impact, compared with 56% in North America and 57% in Asia-Pacific.

However, the results also show a keen interest by investors in Asia-Pacific in allocating more to impact, with 92% of them planning to increase allocations via public markets and 79% via private.

In public markets, a driving force behind this growth in appetite in Asia-Pacific is the broadening definition of fiduciary duty, which includes assessing impact, cited by 54% of investors compared with 25% in Europe and 20% in North America. In Europe, impact also remains top of mind, with 67% expecting to allocate more via public markets in the future and 72% via private.

While a majority of those surveyed are investing in impact solutions, this is still a relatively new concept for many of them, with more than half (58%) saying they have only been doing so for less than three years.

“The challenging market conditions that we have experienced over the last 18 months have had ramifications for asset classes across both public and private markets, including those with a sustainable lens,” states Pascal Dudle, head of listed impact at Vontobel. “Despite this more difficult time, our study shows that investors remain committed to impact investing and are even planning to increase their allocations over the next few years.

“Interestingly, they plan to do so via a far wider range of asset classes across both public and private markets. We see this as a very positive indicator that the concept of impact investing has grown sufficiently in stature to be viewed as a specific and distinct way of investing, rather than a niche area of sustainability.”

Energy transition interest

Looking at the driving force behind allocations to impact investments, energy transition remains top of mind, with 81% and 77% of investors ranking decarbonization and the transition to net zero, respectively, as the key goals they want their impact investments to address. Biodiversity is also rising up investors’ agenda, with more than half (56%) favouring impact investments that promote biodiversity goals.

Looking at what they believe are the most pressing areas that need to be addressed through impact investing, the top three areas include renewable energy (68%), energy efficiency (58%) and water (43%).

While investors have a bias towards environmental objectives, they are nevertheless looking to make an impact across the sustainability spectrum. Nearly six in 10 (58%) want their impact investments to target equal opportunities and diversity goals.

Investors in Asia-Pacific and North America express the strongest preference for these social causes, 66% and 63%, respectively, followed by investors in Europe with 53%.

Greenwashing concerns

Investors continue to grapple with greenwashing when incorporating impact investing into their portfolios. Their top three concerns include misleading or exaggerated impact claims (60%), no clear industry standard or definition for impact managers (49%) and inadequate transparency in reporting (44%).

Being able to evidence the impact of the portfolio is absolutely crucial and must be a key part of investment firms’ reporting frameworks, as 82% of investors say transparency and measurability of impact results is an important factor in selecting impact investing managers.

Investors cite several challenges they have experienced in evaluating impact investing strategies, which will likely discourage them from adopting these strategies. These include lack of reliable data, poor transparency of benchmarks or indices, and a wide range of different approaches among asset managers.

“While we see a clear demonstration of commitment to impact by investors, it is also true that many are still fairly early on their impact journeys,” Dudle adds. “One of the key barriers they face, and a common challenge cited wherever they are based, is a lack of transparency and, therefore, the ability to measure and report on the impact their own portfolios have had. Greater transparency is key to building investor trust and confidence.”

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