A recent survey conducted by the Morgan Stanley Institute for Sustainable Investing reveals that the majority of institutional investors anticipate significant growth in sustainable assets over the next two years. The survey, which polled more than 900 institutional investors across North America, Europe, and Asia Pacific in July and August 2024, highlights a strong optimism toward sustainable investing despite ongoing challenges.

Surge in Sustainable Assets Expected

• Asset Owners’ Optimism: A remarkable 80% of asset owners expect the proportion of their assets allocated to sustainable investment options to increase within the next two years.
• Asset Managers’ Perspective: Similarly, 78% of global asset managers foresee an increase in assets under management (AUM) in sustainable funds during the same period. This growth is anticipated to be driven by new mandates and higher allocations from existing clients.
• Influence on Mandate Decisions: Over three-quarters of asset owners “strongly” or “somewhat” agree that sustainable investing offerings influence mandate decisions. Moreover, 80% require their asset managers to have a sustainable investing policy or strategy in place.

Driving Factors and Challenges

• Client and Stakeholder Demands: Nearly 90% of institutional investors indicate that their sustainable investing activities are driven by client and external stakeholder demands.
• Key Challenges: The top challenges hindering sustainable investing efforts include:
  • Data Availability (71%): Difficulty in accessing reliable and consistent sustainability data.
  • Fluctuating Regulatory Guidance (69%): Uncertainty due to changing policies and regulations.
  • Greenwashing (68%): Concerns over misleading claims about the environmental benefits of investments.
• Regional Differences: Investors in the Asia Pacific region cite these challenges at higher rates than their European and North American counterparts, with particular concern over the burden of disclosure requirements (71%).

Investment Themes and Opportunities

• Priority Sectors: Globally, institutional investors are prioritizing investments in:
  • Healthcare (41%)
  • Financial Inclusion (40%)
• Regional Variations: European investors place a higher emphasis on nature and biodiversity solutions.
• Underappreciated Opportunities: Climate adaptation solutions are viewed as one of the most underappreciated investment opportunities across all regions.

Net-Zero Targets and Carbon Offsets

• Commitment to Net-Zero: Close to two-thirds of asset owners and managers have set net-zero targets, with almost all having a plan to achieve them. Approximately 2% of institutional investors report that they have already reached net-zero emissions.
• Mixed Views on Carbon Offsets:
  • Current Use: Nearly 40% of asset owners use carbon offsets to mitigate portfolio emissions. Additionally, 31% of asset managers offer clients offsets linked to specific products or aggregated emissions.
  • Valid Approach vs. Caution:
    • Valid Approach: 32% of asset owners and 31% of asset managers consider offsets a valid approach to decarbonization.
    • For Hard-to-Abate Emissions Only: 21% of asset owners and 22% of asset managers believe offsets should be used solely for hard-to-abate emissions.
    • Waiting for Certainty: A significant portion remains cautious, with 28% of asset owners and 27% of asset managers waiting for greater certainty before fully embracing offsets.

Expert Insights

Jessica Alsford, Chief Sustainability Officer and Chair of the Institute for Sustainable Investing at Morgan Stanley, commented on the findings:

“Institutional investors see a growth trajectory for sustainable assets globally in the coming years to meet increasing client and stakeholder demands in a more mature sustainable investing market. This year the Institute has released Sustainable Signals reports with views from individual investors, corporates, and institutional investors, with each group seeing sustainability as an opportunity for growth and value creation.”

About the Sustainable Signals Report

Launched in 2015, the Sustainable Signals series by Morgan Stanley measures the views of individual investors, institutional investors, and corporations on sustainable investing. The latest report underscores the growing importance of sustainability in investment decisions and the perceived opportunities and challenges in this evolving landscape.

Conclusion

The survey’s results indicate a robust confidence among institutional investors in the growth of sustainable investments, driven largely by client demand and a recognition of sustainability as a catalyst for value creation. However, challenges such as data availability, regulatory uncertainty, and greenwashing remain significant hurdles that need to be addressed to fully realize the potential of sustainable investing.

Access the Full Report

To delve deeper into the survey findings and gain more insights, view the full results of the latest Sustainable Signals report here.

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