Energy transition assets draw inflows as capital owners embrace impact investing: ‘a valuable tactic’

A rapidly growing group of capital owners around the world are turning to impact investing to give their investment strategies a green shot in the arm as climate-driven capital allocations are rising fast.

Investor appetite for impact investing is one the rise as research from Hymans Robertson in 2022 showed 22% of trustees and pensions plan to alter their investment strategies by moving assets to reduce their portfolios’ emissions and focus more on climate-transition-aligned strategies for impact purposes.

However, the same research revealed that only 9% said they had already or were planning to allocate capital to climate-solution strategies.

Fast forward a year later, and a majority of global institutional investors now plan to increase their allocations to impact-related projects and corporates over the next three years.

While European investors continue to lean on impact investing, investors in Asia are planning to catch up quickly, according to Pascal Dudle, head of listed impact at Vontobel, a Swiss private banking and investment management group headquartered in Zurich.

“The challenging market conditions that we have experienced over the last 18 months have had ramifications for asset classes across both public and private markets, including those with a sustainable lens,” he shared with Net Zero Investor.

“Despite this more difficult time, investors remain committed to impact investing and are even planning to increase their allocations over the next few years,” Dudle pointed out.

Of investors who already invest in impact, or are poised to do so, listed equity is the most popular route with nearly 70% currently utilizing this asset class, he added, as Dudle discussed recent research carried out by his firm which assessed the views of just over 200 institutional investors Europe, North America and Asia-Pacific to understand their thinking and priorities with respect to their current and future impact investing allocations.

In addition, more than half of all investors plan to increase allocations to listed equity over the next three years.

Investors are also planning to broaden the range of asset classes they utilize in the next three years from current allocations, with 51% choosing infrastructure (up from 39%); 38% choosing real estate (up from 26%) and 23% choosing commodities (up from 7%). More than half (57%) said they allocate entirely or mostly to active impact strategies.

“Interestingly, investors plan to do so via a far wider range of asset classes across both public and private markets,” Dudle said.

“I see this as a very positive indicator that the concept of impact investing has grown sufficiently in stature to be viewed as a specific and distinct way of investing, rather than a niche area of sustainability.”

Energy transition

Looking at the driving force behind the growing allocations to impact investments, the energy transition remains top of mind, with eight out of ten investors ranking decarbonization and the transition to net zero as a key goal they want their impact investments to address, while biodiversity is also rising up investors’ agenda, with more than half favouring impact investments that promote biodiversity goals.

Given the weight of the energy transition, Sanjay Joshi, responsible investment consultant at Hymans Robertson, called “impact investing a valuable tactic for net zero strategies.”

He told Net Zero Investor that “it is used across a variety of assets and markets, and it offers investors a way to achieve positive and measurable environmental and social outcomes.”

Investors’ increased focus on impact investing projects around the world is powered by large investors across Asia. 

A keen interest by investors in Asia-Pacific in allocating more to impact, 92% of them planning to increase allocations via public markets and 79% via private, Dudle shared.

In public markets, a driving force behind this growth in appetite in Asia-Pacific is the broadening definition of fiduciary duty, which includes assessing impact, cited by 54% of investors compared with 25% in Europe and 20% in North America. 

In Europe, impact also remains top of mind, with 67% expecting to allocate more via public markets in the future and 72% via private.

“While a majority of are investing in impact solutions, this is still a relatively new concept for many of them, with more than half saying they have only been doing so for less than three years,” Dudle noted.

Fiduciary duty

Despite the general investor mood about impact investing becoming more positive, pension’s fiduciary duty has often been cited seen as an obstacle to incorporating responsible investment and impact-investing strategies, in part because climate risks may not have been consistent with the duty to maximise investment returns or because they might expose portfolios to greater levels of risk.

However, a recent Freshfields report refuted this claim, establishing that ESG consideration and integration as “clearly permissible” with the report placing greater focus on impact.

"It established not only that investing for impact is acceptable, but also that fiduciary duties actually require asset owners to at least consider impact investing," Joshi pointed out.

Referring to the British pension market, he said that "as well as this enhanced understanding of fiduciary duties, the UK government’s Levelling Up agenda is likely to provide a fillip to the impact-investing sector, even if it isn’t focused on net zero outcomes."

Impact investment ‘themes’

As more and more investors turn to impact investing, a growing number of asset owners are forced into choosing themes, which often proves to be a difficult task, Joshi said.

"It involves tackling questions like ‘What is the right level of investment in nuclear fusion, given how far we are from being able to deploy it effectively?’ or ‘To what extent do we need more investment in alternative proteins?’."

Asked what they believe are the most pressing areas that need to be addressed through impact investing, the top three areas include renewable energy, energy efficiency and water.

Investors who want effective theme prioritisation often turn to guidance like the Importance-Tractability-Neglectedness (or ITN) framework, "which allows these questions to be addressed based on climate research, not a gut feeling," Joshi pointed out.

"It’s true that quantifying investor additionality is hard."

FCA's SDR

Another method of impact investing is through investor-level additionality, which refers to the additional positive social impacts resulting from specific investments.

This is recognised by the FCA’s Sustainability Disclosure Requirements (SDR), which require that impact investing achieves not only enterprise-level impact, but also an investor contribution, or investor additionality.

The FCA also states that it is misleading to refer to enterprise-level investing alone as ‘impact investing’.

However, this view is not universally held, with some citing the difficulties in assessing investor-level additionality as being a reason why the sector should weaken requirements compared with the FCA’s standards, remarked Joshi.

“It’s true that quantifying investor additionality is hard, so, to meet this demanding requirements effectively, investors may need their asset managers to make further investments in the coming years,” he concluded.

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