Active engagement and stewardship have leapt in importance as a way for asset managers to drive sustainable change, Schroders Institutional Investor Study 2020 has found.

The study, which spans 650 institutional investors encompassing $25.9 trillion in assets, identified that 59% of institutions said active company engagement and stewardship was a key approach to integrating sustainability.

This was a significant rise on 38% a year ago. Furthermore, investors’ focus on an inclusionary investment approach – essentially the positive selection of ‘best in class’ companies or investments’ – had also risen in importance to 61% from 44%. In contrast, those that opted for an exclusionary approach fell by the same margin to 36% from 53%.

The results suggest that engagement and voting are now increasingly being viewed as an important aspect of achieving change, rather than simply divesting.

Investors said that transparent reporting, tangible outcomes and consistently voting against companies in order to drive change were the three key signs of successful engagement.

For the second consecutive year, environmental issues remained the most important engagement issue for investors. They also pointed to national governments and companies as the two key stakeholders most responsible for mitigating climate change.

This broad dynamic was also reflected more broadly in investors’ continued belief in sustainable investing. Just 12% of investors said they do not invest in sustainable investments, significantly down on 19% a year ago.

This trend is expected to continue. In total, 68% of investors globally said they expected investing sustainably to grow in importance over the next five years.

Driving this focus were institutions looking to align their investments with their own corporate values, responding to regulatory and industry pressure, and, positively, the belief that investing sustainably can drive higher returns and lower risk.

However, as sustainable investing has become an increasingly mainstream investment consideration, the study found that greenwashing has emerged as a new challenge.

Some 60% of investors felt greenwashing i.e. ‘a lack of clear, agreed sustainable investment definitions’ was the most significant obstacle to their sustainable investment intentions.

Alongside the investment challenges related to greenwashing, almost half of investors (48%) said that a lack of transparency and reported data was restricting their ability to invest sustainably, an increase on 40% a year ago.

Encouragingly, however, performance concerns have continued to diminish. Just under half (45%) of investors cited performance concerns related to investing sustainably, down from 48% a year ago and 51% in 2018.

Indeed, some 55% of investors said that data/evidence which proves investing sustainably delivers better returns would encourage them to increase their allocations, a theme that has continued to grow in importance over the past three years, increasing on 49% a year ago and 34% in 2018.

Andy Howard, Global Head of Sustainable Investments, Schroders, said:

“Investors are asking more from their asset managers when it comes to sustainability, and those demands are becoming increasingly sophisticated.

“We can help clients navigate the sustainable investment landscape and support them in achieving their objectives through proprietary tools like SustainEx, and drive positive impact through our engagement and voting activity. The evidence is consistently growing that sustainable investment and robust returns are not mutually exclusive.

“We welcome regulatory efforts to harness tangible action and help fight greenwashing. This should support delivering real change and allow investors to make informed decisions. At the same time, it is also crucial that asset managers and investors do not feel overwhelmed by these growing demands and amount of sustainability information. We are working closely with industry initiatives, policymakers and regulators to strike the right balance.”

Elly Irving, Head of Engagement, Schroders, said:

“Active ownership has become more important than ever. Investors have a duty to hold companies accountable and an opportunity to drive positive change. It’s why Schroders has such a strong commitment to active ownership. By engaging with companies and using our voting rights, we can drive sustainable change to better meet the investment needs of our clients.

“As we close in on 100% integration across all of our assets, engagement is now an investor-driven activity that’s prevalent across the whole firm.”

About Schroders Institutional Investor Study:

This global study was commissioned by Schroders for the fourth consecutive year to analyse institutional investors and their attitudes towards investment objectives, performance outlook and risks to their portfolio. The respondent pool represents a spectrum of institutions, including pension funds, insurance companies, sovereign wealth funds, endowments and foundations managing approximately $25.9 trillion in assets. The research was carried out via an extensive global survey during April 2020. The 650 institutional respondents were split as follows: 179 in North America, 248 in EMEA, 173 in Asia Pacific and 50 in Latin America. Respondents were sourced from 26 different countries.

To view the full report and findings, please click here.

Source: Schroders