Four out of five asset managers and owners expect to see increases in their sustainable assets under management (AUM) and allocations over the next two years, with sustainable investing offerings emerging as a key differentiator for the large majority of investors, driven by the anticipated exposure to growth opportunities from sustainable investments, and a more established track record for sustainable investing strategies, according to a new survey released by Morgan Stanley.

For the report, “Sustainable Signals,” Morgan Stanley surveyed more than 900 institutional investors across North America, Europe and Asia Pacific, including 295 asset owners and 606 asset managers.

Overall, the survey found that 78% of asset managers and 80% of asset owners globally expect assets in sustainable funds to grow in the next two years, with only 3% in each group expecting a decline in sustainable investment allocations or AUM over the same period.

Among those anticipating growth, the top reasons for the expected increase included the exposure to growth opportunities offered by sustainable themes, cited by nearly 90% of investors, and the maturity of sustainable investing as a strategy, with an established track record, cited by more than 80%. The large majority of these investors also expect increased AUM in sustainable investing to come from a variety of sources, including new mandates from asset owners switching from other asset managers due to sustainable investing offerings (83%), increased allocations from existing clients (83%), and assets owners allocating to sustainable investing for the first time (81%).

As investors increasingly view sustainable investing as a more mature strategy with upside from exposure to growth opportunities, the survey found that a large majority of both asset managers (79%) and asset owners (76%) now view sustainable investing offerings are a key differentiator in decisions on investment mandates. Examining the key reasons for practicing sustainable investing, nearly 90% of respondents cited demand from clients and external stakeholders, followed by portfolio risk reduction at 80%.

The survey found that well over half of investors now have net zero investment targets, including 65% of asset owners and 57% of asset managers. Nearly all with net zero goals said that they have a plan to deliver their targets, with top strategies including tilting mostly towards low emitters (25%), shifting capital to high emitters that are decarbonizing (25%), or a combination of both strategies (28%).

The survey assessed the key challenges to sustainable investing currently facing investors, with data availability and consistency emerging as the top barrier, cited by more than 70% of respondents as a very or somewhat significant challenge, followed closely by fluctuating regulatory guidance at 69% and greenwashing at 68%. Morgan Stanley noted that sustainability expectations could raise concerns in the relationships between asset owners and managers, with 71% of asset owners reporting that they are concerned about greenwashing from asset managers, and two thirds of asset managers saying that asset owners have unrealistic expectations about sustainability outcomes.

The report also examined investors approaches and attitudes towards the use of carbon offsets. The report found that nearly two thirds of asset owners either already purchase carbon offsets to mitigate their portfolio emissions (39%) or plan to over the next 2 years (25%). Only 3% of asset owners and 6% of asset managers believe that offsets should not be used at all as part of a decarbonization strategy, while slightly over 30% of each group said that offsets are a valid approach to broader decarbonization strategies, and slightly over 20% believe that they should only be used for hard-to-abate emissions.

Jessica Alsford, Chief Sustainability Officer and Chair of the Institute for Sustainable Investing at Morgan Stanley, said:

“Institutional investors see a growth trajectory for sustainable assets globally in the coming years to meet increasing client and stakeholder demands in a more mature sustainable investing market. This year the Institute has released Sustainable Signals reports with views from individual investors, corporates and institutional investors, with each group seeing sustainability as an opportunity for growth and value creation.”

Click here to access the survey.