Transparent reporting, tangible outcomes and consistent voting against management identified as signs of successful engagement.
Institutional investors increasingly favour a proactive and positive approach to sustainable investing, according to Schroders’ recently released Institutional Investor Study 2020.
When asked to rank their preferred approach to implementing sustainable investments, 59% of respondents cited active company engagement and stewardship, up from 38% a year ago.
The survey also revealed strengthening investor interest in an inclusionary investment approach, or positive screening of the ‘best in class’ companies or investments, favoured by 61%, compares with 44% in 2019.
Both approaches were less popular than integration of ESG factors into existing investment processes, cited by 67% up slightly from 64% in 2019, In contrast, the popularity of the exclusionary approach is dwindling, falling to 36% from 53% last year.
According to Schroders, the results suggested engagement and voting are being increasingly considered as an important aspect in driving change, as opposed to simply divesting.
Transparency in reporting, tangible outcomes and consistent voting against companies were identified as the three main signs of successful engagement by investors, with 52%, 45% and 43% respectively saying so.
The study, conducted in April, draws on responses 650 institutional investors from across the world, representing a spectrum of investment institutions, including pension funds, insurance companies, sovereign wealth funds, endowments and foundations managing approximately US$25.9 trillion in assets.
Environmental issues, such as climate change and use of fossil fuels, continue to be amongst the most widely prioritised engagement topics, rising to 58% this year, an increase of four percentage points from 2019. Corporate strategy followed hot in its heels, at 58% too, an increase of five percentage points from last year.
However, views varied across continents, with environment being a top priority for EMEA investors at 47%. North American investors highlighted cyber security (40%) and diversity (36%), while Asia Pacific investors laid more emphasis on labour rights (38%).
With almost half of institutional investors (49%) saying they have increased sustainable investment allocations over the past five years, 68% of investors globally said they expected the sector to play an increasingly important role over the next five years.
But as sustainable investing becomes increasingly mainstream, greenwashing has been cited as a new challenge that investors are having to face. Approximately six in ten investors mentioned greenwashing, due to a lack of clear, agreed definitions, as the most significant obstacle in their sustainable investment decisions.
Other impediments include a lack of transparency and reported data, cited by almost half of investors (48%), an increase on 40% from the previous year. More than half (55%) agreed that evidence of sustainable investing giving better returns would encourage them to increase their allocations.
“The evidence is consistently growing that sustainable investment and robust returns are not mutually exclusive,” said Andy Howard, Global Head of Sustainable Investments, Schroders.
“We welcome regulatory efforts to harness tangible action and help fight greenwashing. This should support delivering real change and allow investors to make informed decisions. At the same time, it is also crucial that asset managers and investors do not feel overwhelmed by these growing demands and amount of sustainability information. We are working closely with industry initiatives, policymakers and regulators to strike the right balance.”