Institutional investors seeking change are going beyond divestment

Study shows ESG-investment pendulum swinging toward active engagement and stewardship

Institutional investors seeking change are going beyond divestment

When faced with the choice between fighting or fleeing in ESG investing, most institutional investors are now deciding to go on the offensive, according to a new study by Schroders.

In a survey of 650 institutional investors around the world that represent US$25.9 trillion in assets, it found 59% saw active company engagement and stewardship as a key approach to integrating sustainability, compared to just 38% a year ago. Institutional focus on inclusionary investing, where “best in class” companies or investments are favoured, also rose from 44% to 61%.

On the other hand, the share of institutions adopting an exclusionary approach declined from 53% to 36%. In other words, it seems that rather than walking away and avoiding companies that don’t live up to their sustainability standards, more investors are looking to drive change through engagement and the use of voting power.

“Active ownership has become more important than ever,” said Elly Irving, head of Engagement, Schroders. “Investors have a duty to hold companies accountable and an opportunity to drive positive change.”

Among the issues that investors are concerned about, environmental concerns took the top spot for the second consecutive year. Respondents also cited national governments and companies as the two central stakeholders who have the responsibility to mitigate climate change.

The belief in sustainable investing remains on its path toward universality, with the number of detractors among investment institutions falling from 19% last year to 12% this year. And more than two thirds (68%) of investors globally forecast investing sustainably to grow in importance over the next five years.

That predicted trajectory is in line with institutions’ plans to align their investments with their own corporate or internal values (shared by 58% of respondents); respond to regulatory and industry pressure (49%); and seek potentially higher returns for lower risk (35%).

But alongside the growth in sustainable-investing interest, the respondents indicated that greenwashing is becoming a more prominent challenge. Sixty per cent of investors in the survey felt that greenwashing, based on “a lack of clear, agreed sustainable investment definitions,” was the most substantial obstacle to their plans to invest for sustainability.

There are also signs that doubts surrounding sustainable-investment performance are dissipating. The percentage of investors who expressed concerns related to performance has declined from 48% last year to 45% today. Additionally, 55% said that they’d be encouraged to boost their allocations if they had data or evidence proving that it delivers better returns, compared to just 49% last year.


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