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Major Investors Ready to Re-Think Portfolio Strategies Amid Changing Markets, Climate and Society
 

Nuveen’s EQuilibrium Global Institutional Investor Survey

Around the world, about two-thirds (66%) of major institutional investors are more worried now than two years ago about extreme events disrupting their investment strategies—and nearly as many (64%) believe investors need to completely re-think how they approach portfolio construction.

Those are among the key findings of Nuveen’s 2nd annual EQuilibrium Global Institutional Investor Survey, released today, which indicates that investors are reacting to a remarkable climate of change across many fronts. Among the key forces at work are new uncertainty regarding rising inflation and interest rates, volatile markets, a spate of damaging weather and climatic events, and increased awareness of social inequality.

A Need to Be Forward Looking, Flexible

Investors are responding by pursuing a range of portfolio strategies, from increasing investments in private assets, to addressing the risks and opportunities of climate change in their portfolios, and considering diversity and inclusion factors when they evaluate and hire investment managers.

“With all the complexity and rapid change now driving communities, economies and the environment, institutional investors urgently need a forward-looking perspective and the flexibility to consider new approaches,” said Mike Perry, Head of Nuveen’s Global Client Group. “Our survey provides the latest insights into how major investors worldwide are thinking about these factors – and some signals regarding the solutions they are likely to embrace in the coming months and years.”

Nuveen’s EQuilibrium Global Institutional Investor Survey examined the views and practices of 800 global institutional investors and consultants spanning North America, Europe, the Middle East and the Asia Pacific region in October and November 2021. All survey respondents were decision makers and represent organizations with at least $500 million in assets.

Investors Position for Inflation, Look to Alternative Credit for Yield

With slowing growth, increased volatility, upward pressure on interest rates and higher inflation, investors will face a generally more challenging environment going forward. On the geopolitical front, “we don’t believe that the Russia/Ukraine conflict should be driving long-term portfolio strategy changes,” Perry said. “However, if events in Ukraine continue to escalate and the global security response increases, we expect continued volatility across risk assets.”

About six in 10 (61%) investors say they are taking steps to increase inflation risk mitigation over the next 12 months.

With traditional fixed income assets no longer producing robust income, three-quarters of investors say they plan to expand their reach for yield over the next two years. The vast majority (62%) are looking to alternative credit.

Private credit saw the biggest year-over-year increase in the percent of asset owners who hold the asset class. Now, 72% hold private credit, compared with 62% in 2020, and 31% say they plan to increase assets over the next two years. 

“An environment of low, yet rising interest rates and high inflation can make middle-market loans, infrastructure debt, real estate debt and other forms of private credit particularly attractive,” said Perry. 

Seeing Both Risk and Opportunity in Climate Change

Climate risk (50%) along with investment management technology (51%) top the list of the emerging trends that investors believe will be most influential to their portfolios over the next five years. 

Investors now generally agree (71%) that climate risk is, in fact, investment risk; 79% also agree that the transition to a low-carbon economy is inevitable; and 86% say the transition will present new investment opportunities. Of note, clean energy was the top choice (73%) for investors who plan to increase allocations to infrastructure.

“Investors want to protect their portfolios from threats posed by more expensive prices for clean energy, disruptions to business activity, and other direct and indirect consequences of climate change,” said Amy O’Brien, Global Head of Responsible Investing. “But they also are identifying ways to invest in technologies, infrastructure and other assets that will facilitate the transition to a low carbon economy. 

“The survey also suggests that many investors are still early in their journeys to address climate risk in their portfolios and are focused on balancing traditional tactical allocation needs with longer-term systemic changes,” said O’Brien. Eighty percent of investors say that, over the next two years, defining climate objectives and a roadmap will be a priority; just 53% identified portfolio allocation changes as a priority.

ESG Investing Now a Mainstream Practice

Investing based on environmental, social and governance (ESG) considerations is now a mainstream practice: the overwhelming majority of asset owners (87%) say they consider ESG factors when making investment decisions or plan to within the next year.

Reputational risk and “doing good while investing well” are the top motivations for ESG (both at approximately 50%), while one in three of those surveyed cite stakeholder pressure as a driver.

“Data quality remains a barrier to more effective ESG integration,” said O’Brien. “But regulatory changes and ongoing enhancement of the precision, consistency and transparency of ESG data — as well as more structure around properly mapping ESG to material factors in a company’s performance — should continue to propel further ESG integration.”

Momentum in particular is building for investments designed to have a tangible impact related to urgent social issues and concerns. “For some institutions, this involves adding impact investments that address specific social causes to their portfolios,” said O’Brien. “For others, it means incorporating practices for diversity, equity and inclusion into how they build their internal teams or select outside managers. Investors are increasingly focused on the interaction of environmental and social investment decisions.”

More than half (52%) of investors and consultants agree that investors can impact social inequality through investment choices. Half of asset owners (49%) currently invest in social investments or plan to in the next two years; they are exploring a range of opportunities from community infrastructure projects (43%) and fintech innovations addressing financial inclusion (42%) to investments focused on diversity, equity and inclusion (DE&I) efforts (40%) and affordable housing (38%).

DE&I a Key Consideration in Strengthening Workforces, Hiring Outside Managers

DE&I metrics are steadily making their way into processes for strengthening workforces, selecting and hiring investment managers, and choosing specific investments.

“Investors globally are increasingly aware of the business risks that lack of diversity and inclusion in the workplace can pose, as well as the benefits of a diverse workforce for innovation and financial problem-solving,” said O’Brien. Nearly half of organizations (49%) are setting clear goals and targets for DE&I hiring, retention and talent development; 39% are setting DE&I inclusion/membership goals for internal boards and committees.

Over half (55%) of asset owners and consultants indicate that DE&I metrics influence the manager selection process; 62% agree that better investment outcomes are driven by a diverse team of portfolio managers. And, 61% report setting, or considering setting, standards for investment partners and consultants around DE&I measures and progress.

About Nuveen’s EQuilibrium Global Institutional Investor Survey

Nuveen and CoreData surveyed 800 global institutional investors and consultants in more than 20 countries in North America, Europe, the Middle East and the Asia Pacific region in October and November 2021. The survey was supplemented with 10 qualitative interviews. Respondents are decision-makers at corporate pensions, public/governmental pensions, insurance companies, endowments and foundations, superannuation funds, sovereign wealth funds and central banks as well as consultants. Asset owner survey respondents represent organizations with assets of more than $10 billion (55%) and less than $10 billion (45%), with a minimum asset level of $500 million. The survey has a margin of error of ± 3.5% at a 95% confidence level.

 

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