Nearly two thirds of institutional investors cite long-term financial returns as a key driver of investing in sustainability and impact strategies, ahead of any other driver, according to a new study released by global investment manager Schroders, which found a shift in focus on sustainable investing towards capitalizing on opportunities, rather than primarily as a risk management tool.

For the report, Schroders Institutional Investor Study 2023, Schroders surveyed 770 institutional investors across 36 regions globally, representing nearly $35 trillion in assets under management.

Among the survey respondents, half reported that they have set net zero GHG emissions goals for their portfolios, including 39% targeting net zero by 2050, with another 30% either having some emissions reduction goal, or in the process of drafting plans to do so. 21% of investors reported having no intention currently to set a net zero goal, including 39% of North America-based investors.

According to the study, a belief that investing in sustainable investments is required to achieve long-term financial returns emerged as the most cited reason, reported by 64% of investors, when asked to list the top 3 drivers for investing in sustainable and impact strategies, followed by portfolio diversification (62%) by investing in new sectors such as nature-based solutions or green hydrogen, and a wish to align portfolios with legal or regulatory directives (60%), such as the EU’s SFDR. U.S. investors were particularly returns-focused, with 74% citing financial returns as a top reason for investing in sustainability strategies, followed by diversification at 66%.

In addition to highlighting returns as a key driver, the study indicated an increasing focus on viewing sustainable investing as a source of opportunity and on the impact of their investments, with thematic investing emerging as the top preferred approach to investing sustainably, cited by 61% of respondents, followed by impact at 59% – up from only 34% in 2020 – and exclusion of certain activities or sectors at 54%.

The survey found that around two thirds of investors believe that private asset investing will offer the best opportunities to target key trends such as the energy transition or impact investing, as well as to help achieve diversification goals. Within private assets, infrastructure was identified as the most suited now for achieving sustainability and impact objectives, cited by 44%, followed by natural capital and biodiversity by 41%, and private equity at 39%.

The study also examined the investors’ most important criteria for selecting and impact investment, with 60% identifying having an impact which is easily measured and understood as most important, followed by the investment’s impact on issues important to the investors’ ESG approach at 55%, and having an impact beneficial to stakeholders at 52%.

When asked about the external support their organizations will need to help reach their net zero goals, 51% of investors highlighted a need for support in measuring and tracking net zero targets, up from 37% last year, followed by greater consensus needed around frameworks and methodologies to measure net zero pathways at 49%, and more guidance from regulators, at 43%.

Andy Howard, Global Head of Sustainable Investment at Schroders, said:

“This year’s findings highlight that institutional investors are increasingly focused on the thematic exposures and the impact of their investments. This implies clients want to take a more nuanced approach to sustainable investing than in the past. They increasingly consider integration to be a given and instead want to take advantage of more focused opportunities. As the world grapples with regime shift and the trends of deglobalization, decarbonization and demographics on the investment landscape, sustainability themes are becoming increasingly important, creating new opportunities for companies and investments that provide sustainable products and services. As a result, investors are looking to identify and allocate capital to these emerging sustainable investment themes.”

Click here to access Schroders Institutional Investor Study 2023.