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Investors Look to Expand Scope of ESG Investments in Fixed Income and Alternatives

Fixed income catching up with equities as sustainable investing expands across asset classes, says BlackRock.

Investors plan to significantly increase the proportion of fixed income and alternatives allocations subject to ESG-based investment criteria, according to a new report from BlackRock.

The US asset manager’s ‘2020 Global Sustainable Investing Survey’ found that 61% of respondents will consider investing in sustainable fixed income funds in the future, versus 42% currently investing in fixed income using sustainable investment criteria at present.

According to the survey, 63% of investors invest in public equities via sustainable funds, with 66% expecting to do so in the future.

The report suggests that the EMEA region will see the strongest interest in investing in sustainable fixed income, with 72% saying they will invest in the future. Currently, over half of EMEA respondents have sustainable allocations in fixed income.

In the APAC region, almost half (49%) of investors stated they would consider sustainable fixed income funds in the future, from 30% at present. In the Americas, currently less than a quarter (24%) of respondents invest in fixed income sustainably, but 38% said they would like to increase allocations going ahead.

The BlackRock survey suggested strong future growth in both active and passive sustainable fixed income products. More than half (54%) of investors said they would consider buying sustainable versions of active fixed income funds by 2025, representing a 17 percentage-point increase, while use of sustainable indexed funds for fixed income investments could more than double to 35% over the same period.

The passive sustainable fixed income sector has already seen increased activity in Europe. Fixed income ESG ETFs gathered €4.7 billion in new assets in the year to September, almost twice the amount accumulated (€2.8 billion) over the same period in 2019.

A recent report by Royal London Asset Management said adoption of sustainable investing principles by fixed income investors lagged equities partly due to insufficient data to support analysis, but also because of “far less understanding of how ESG factors might affect issuers and individual bonds”.

Illiquid investments turning sustainable

BlackRock’s survey also found that 56% of investors would consider investing in illiquid alternatives, typically real estate and infrastructure investments made via private equity, using sustainable funds in future, compared with 36% currently doing so. In EMEA, 65% respondents said they will consider increasing sustainable investments in illiquid alternatives, with 39% saying they have currently allocated capital in the asset class.

For liquid alternatives, typically hedge funds, only 6% of investors said they currently have sustainable allocations, with 15% saying they would invest sustainably in future.

BlackRock surveyed 425 investors from 27 countries between July and September, including sovereign wealth funds, corporate and public pension plans, insurers, asset managers, endowments, foundations and global wealth managers, representing approximately US$25 trillion in assets under management.

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