U.S. institutional investors are increasingly looking to private assets opportunities to invest sustainably, according to global asset manager Schroders, which released the U.S. findings of its Institutional Investor Study.

The annual study, which spans 200 North American institutional investors, (26% of our total 770 global respondents) including 117 in the U.S. representing over $7 trillion in U.S. assets, gauged institutional investor sentiment on the key trends and drivers impacting the investment landscape, and how they are managing their portfolios accordingly.

Private assets to take bigger role in portfolios and sustainable strategies

Nearly a third (32%) of U.S. institutional investors plan to increase their private asset allocations over the next two years, primarily due to diversification benefits, lower volatility and the potential to garner higher returns than the public markets. Investors had the highest interest in increasing allocation to infrastructure investments, with 42% planning to do so over the next 12 months.

Investors also see private assets as an opportunity to incorporate sustainable and impact investments into their strategy. When asked about some of the key investment themes investors want to allocate to through private assets, 49% of participants listed the technological revolution, followed by 39% seeking to proactively allocate to private investments tied to the energy transition, a theme many believe will spur investment in innovation, creating significant investment opportunities.

Active ownership and engagement, along with impact investing, also ranked highly as preferred private assets investment approaches when it comes to investing in sustainable and impact strategies, and 23% of investors noted that actively engaging with portfolio companies and borrowers to ensure achievement of impact targets is the best way to ensure positive and measurable impact in private assets investing.

That said, obstacles remain, including the limited track record of both financial and sustainability performance of funds and mandates (which 63% cited as an obstacle), and weak sustainability and impact measurement practices of asset managers and investee companies (51%).

Related Article: Schroders Marks Sustainability Milestone with Top Ratings for Impact Investing

“Amid continued volatility and geopolitical uncertainty, investors are looking for opportunities for diversification and returns that align with trends shaping global markets,” said Nick Thompson, Head of Private Asset Sales, North America. “Private assets investing can allow them access to companies and industries at the forefront of major developments, such as the energy transition and technological innovation. Asset classes like private equity and infrastructure investing can offer both high returns and sustainable opportunities.”

Investors harnessing thematic trends through sustainable investing

Institutional investors are prioritizing investments with companies that are leaders and aligned with the energy transition. When asked for their preferred approach to investing sustainably, U.S. respondents highlighted thematic (69%, compared to 61% globally) as their top choice. This data illustrates a shift from simply considering ESG as a risk mitigation tool, to identifying and targeting thematic sustainability opportunities arising from macroeconomic shifts.

Despite ongoing arguments about the role of ESG in portfolios, U.S. investors continue to see value. Seventy-four percent of U.S. investors said that a top three reason for investing in sustainability and impact strategies was the belief that doing so is required to achieve long-term financial returns. Sixty-six percent stated that they are motivated by the appetite to diversify into new sectors (e.g., nature-based solutions, green hydrogen, the Just Transition, etc.), further emphasizing investors’ thematic focus.

When it comes to the issues that investors see as most important for them in terms of active ownership, corporate governance was the top theme for all regions followed by human capital management (53%) and human rights (53%) for North American investors. U.S. investors understand the importance of issues around financial inequalities, social and racial disparities and the challenges faced by workers, a topic that our Human Capital Management Research, in collaboration with Saïd Business School, University of Oxford and the California Public Employees’ Retirement System (CalPERS) has addressed. See here for more details.

Marina Severinovsky, Head of Sustainability, North America commented, “As the world grapples with regime shift and the trends of deglobalization, decarbonization and demographics on the investment landscape, sustainability themes are becoming increasingly important, creating new opportunities for companies and investments that provide sustainable products and services. As a result, investors are looking to identify and allocate capital to these emerging sustainable investment themes. They recognize that they have the opportunity to drive change on real issues that can simultaneously lead to positive portfolio outcomes, which is apparent in investors’ current appetite for thematic investing.”

Inflation, interest rates and geopolitical concerns remain

U.S. investors were split in their confidence level of achieving their return expectations over the next two years: 54% were somewhat confident, while 45% were confident or very confident (4% said they are not confident at all).

Affecting their view are several factors that they believe will impact their portfolios over the next year, including geopolitical uncertainty (54%), tapering of monetary policy (45%) and rising inflation (44%).

Adam Farstrup, Head of Multi-Asset, Americas, added, “We’re in a whole new age of investing as real rates and inflation pressures remain higher for longer. Further, decarbonization, deglobalization and demographics – the factors that make up what we call “The 3D Reset” – will continue to have massive long-term implications for the global economy and sustain these trends. Investors will need to understand the impact of these forces and adapt their investment strategy in order to capitalize on opportunities and avoid risks associated with this rapidly changing landscape.”