Asset owners warm to ESG potential of real assets

Asian investors are becoming increasingly receptive to strategies with a pure environmental, social and governance (ESG) real asset focus, rather than a returns-led approach, according to a new study by Aviva Investors.

The results of the study show there has also been a surge of Asian institutional investors citing ESG impact as a primary reason for allocating to real assets such as real estate, energy and infrastructure.

The Aviva survey polled 500 institutional investors, representing a combined $3.5 trillion of assets; among them pension schemes, insurers, official institutions, endowments and foundations. Asia-Pacific respondents included 25 each from China, Hong Kong, Singapore, Japan and Australia.

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The use of real assets to make a positive ESG impact has grown, with 31% of Asian investors naming positive ESG impacts as a primary reason for allocating to real assets for 2023, up from 22% three years ago.

Among investors globally, 47% currently maintain allocations of up to 10% to real assets, and one in five have exposure of at least 20%. Almost two-thirds plan to increase their allocations to real assets in the next two years.

"Gone are the days when allocations to each asset class within real assets would be looked at in isolation," said Daniel McHugh, chief investment officer at Aviva Investors Real Assets. "Instead, investors are often looking for a multi-asset and outcome-led approach which can align with their corporate values."

Around one-third of investors in Europe and Asia employ mainly real assets for positive ESG outcomes, compared with just 10% of North American investors.

Investors highlighted risk-adjusted returns potential, diversification and alignment with organisational values as the main influences when picking real assets to make a positive social impact.

ESG BACKLASH

The positive outlook for ESG investing via real assets sits against a background of increasing scepticism about ESG and the challenges of sourcing the right types of investment.

The Aviva study says belief in the importance of sustainable investing is “running slightly ahead of perceptions of the impact potential of sustainable real assets”.

Two-thirds of respondents reported that their organisations had a responsibility to invest sustainably, but only half of those believed real-asset investments could have a more direct ESG impact than listed equities and credit.

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There is also an apparent lack of confidence in net-zero carbon emissions and the role real assets can play in meeting that ambitious goal. More than half (56%) of institutions were unsure of their ability to fulfil their long-term net-zero and sustainability commitments.

Aviva said none of that justified the negativity increasingly directed at ESG strategies.

The backlash against ESG “is a seriously misguided development in the face of climate change, biodiversity loss and social inequality” McHugh said.

ALLOCATION CHALLENGE

In Asia, institutions are increasingly looking to real assets for capital preservation. Difficulties in finding suitable investment opportunities, high transaction costs and asset valuations are seen as the greatest barriers to such investment.

European and Asian investors are more open than North American institutions to approaches with a pure ESG focus. For example, 53% of Asian institutional investors surveyed described real-asset strategies with a net-zero or decarbonisation emphasis as appealing, but only 37% of North American institutions shared that view.

For many, supporting society’s transition to low-carbon energy sources is a theme that best hits the sweet spot. Investors deemed real-asset investments that promote the energy transition as having both the best ESG impacts (50%) and financial returns (56%).

By contrast, respondents identified investments in emerging technologies and infrastructure networks as offering good return potential but only a modest positive ESG impact (23% and 18%, respectively).

Renewable infrastructure is set to be the biggest beneficiary of the increase in real asset allocations. Among institutions with existing exposure to low-carbon new-build real estate, 30% are looking to allocate more capital. Meanwhile, 32% of institutions that hold decarbonising real assets want to do more in the space.

Three-quarters of those investing for a positive social impact picked social infrastructure projects – for example those linked to healthcare and education – as their preferred option. This was followed by social housing and urban regeneration infrastructure projects.

Asia-Pacific investors are most worried about supply chain disruptions, with respondents citing the asset class’s illiquidity and valuation concerns as the biggest risks to initiating exposure or adding to existing allocations.