Ninety-six percent of institutional investors in a survey released Tuesday by Natixis Investment Managers said their organizations had an important role to play in addressing global challenges, such as climate change, social and economic inequality and the need for infrastructure development.
Six in ten said they would be likelier to invest in projects that helped provide solutions to societal challenges if those projects presented a risk/return profile in line with their portfolios’ long-term goals.
Natixis noted that balancing short-term risks and long-term objectives was a familiar conundrum for institutional investors. Since the 2008 financial crisis, strict liquidity requirements have limited institutions’ investment options while ultra-low interest rates over the past decade have pushed their future obligations higher.
Add to that the Federal Reserve’s actions in March to stabilize the financial market by reducing rates almost to zero after the coronavirus pandemic was declared a national emergency.
In the survey, which was completed before the onset of the pandemic, 57% of institutional investors said solvency and liquidity requirements created a bias for short time horizons and highly liquid assets.
Forty-eight percent said the market’s focus on short-term performance expectations inhibited their ability to execute long-term strategies, and 31% reported internal pressure from their own boards’ focus on quarterly results.
“Institutional investors must now find ways to meet their mandates in a world that’s even more yield starved while facing unprecedented social, political, financial and environmental threats,” David Giunta, chief executive for the U.S. at Natixis Investment Managers, said in a statement.
“We’re seeing institutions draw on a wider variety of assets and resources now more than ever to achieve their long-term objectives.”
CoreData conducted the survey in October and November among 500 global managers of corporate and public pension funds, foundations, endowments, insurance funds and sovereign wealth funds, including 129 based in North America.
According to the survey, 48% of investors said institutions should put capital to work to address environmental, social and governance issues. Similar percentages said they should champion corporate governance, including enhanced diversity and inclusion policies and practices, and use their clout to influence the policies and actions of their portfolio companies.
Survey respondents said their main reason for integrating ESG was to align their portfolios with their firm’s values, but they also saw a strong investment case for sustainable investing strategies. Sixty-five percent maintained that ESG analysis had a valid place alongside fundamental analysis, and 54% said there was alpha to be found in ESG.
Seventy percent said they expected ESG investing to become a standard practice across the industry within the next five years.
At the same time, institutions said they were looking for more robust data to measure ESG’s performance.
More than three-quarters of institutions said they were invested in sustainable infrastructure projects, many of which have the potential to generate social, economic and environmental benefits alongside financial returns.
However, although 32% said they wanted to increase their allocations to infrastructure, 34% worried about the associated risks, particularly in emerging and frontier markets. Thirty-one percent were also concerned about the lack of clear measurement standards.
Risks notwithstanding, the Natixis survey found a trend toward private investments among institutional investors, with some seven in 10 saying private assets would be more prominent in their investment strategies going forward.
Three in five investors said their main reasons for investing in private assets were for diversification and because the return/yields on private assets were more attractive than traditional markets.
Seventy-one percent said the returns of private assets made them worth the liquidity risk, and 63% said their potential performance made them worth the higher fees.
“Impact investing has vast promise and the possibility for win-win arrangements on a massive scale, but these types of initiatives often present risks that are prohibitive for institutional investors,” Dave Goodsell, executive director of Natixis’ Center for Investor Insight, said in the statement.
“Platforms such as blended finance have the potential to make investing in socially beneficial projects more realistic for institutional teams, and free up capital to improve living conditions around the globe.”
Successfully investing in private assets and alternatives demands particular skills and experience. Natixis said that that was likely the reason why three-quarters of institutional teams reported that they outsourced at least some investment management functions in order to access specialized expertise.
Thirty-six percent said they outsourced to help them look for strategies tailored to their risk-return profile, and 32% said they did so for new sources of diversification and yield.