Global institutional investors are more concerned about extreme events now than they were in 2020
Portfolio construction is due a re-think according to global institutional investors.
With rising inflation and interest rates, volatile markets, climate change, and social inequality all conspiring to add risk to investment portfolios, a survey of 800 global institutional investors and consultants in more than 20 countries in North America, Europe, the Middle East and the Asia Pacific, reveals heightened concern.
Two thirds of respondents to the Nuveen EQuilibrium Global Institutional Investor Survey said they are more worried now than they were two years ago about extreme events disrupting their investment strategies.
A similar share believes that investors need to completely re-think how they approach portfolio construction, such as boosting investments in private assets, assessing how climate change may impact their portfolios, and considering diversity and inclusion when hiring or evaluating 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.
Inflation and geopolitical risk
Six in ten respondents said they are taking steps to mitigate inflation risk in the next 12 months.
This will include seeking alternative ways to expand their quest for yield, given the less robust income from fixed income assets. Private credit is part of this plan.
"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.
Asked about the potential impact of the Ukraine crisis, Perry said it should not be driving long-term portfolio strategy changes.
“However, if events in Ukraine continue to escalate and the global security response increases, we expect continued volatility across risk assets," he added.
Climate change risk and opportunity
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.
Respondents generally agree that climate risk is investment risk, that transition to a low-carbon economy is inevitable, and that this will present opportunity for investors.
"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.”
A defined roadmap and climate objectives will be essential in the next two years, respondents said.
As identified in multiple surveys, ESG is now becoming more mainstream for investment decisions and policies, but information from companies needs to improve.
"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."
Social inequality and DE&I
Among other key factors impacting investment portfolio construction are social inequality, and diversity, equity, and inclusion (DE&I).
For some institutions, this means adding impact investments that address specific social causes to their portfolios.
"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," added O’Brien.
Over half of asset owners and consultants said 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.
