Over half of institutional investors anticipate that geopolitical uncertainty (55%) and rising inflation (53%) will have the most significant impact on their portfolio performance over the next year, according to a Schroders poll.
The , based on a survey conducted in June 2023, analysed the perspectives of 770 global institutional investors responsible for a collective $34.7trn in assets.
EMEA-based investors were found to be the most concerned about geopolitical uncertainties (59%), likely due to the impact of the Russia-Ukraine conflict on European countries. In comparison, 52% of Asia-Pacific and 51% of North American investors shared these concerns. For North American investors, rising inflation seemed less of a pressing issue, affecting only 50% of portfolios, as opposed to 55% for Asia-Pacific region and 53% for European investors. Other concerns included the tapering of monetary policy (48%) and the possibility of stagflation (42%), a problematic blend of slowing growth and accelerating inflation.
Energy transition and deglobalisation
According to the Schroders study, 67% of respondents believe that decarbonisation and the energy transition will create significant investment opportunities in green technology. Furthermore, 41% think that infrastructure and renewables are best placed to capture investment opportunities in the medium term.
Deglobalisation was identified as having a significant impact on investment strategies. Specifically, 52% of investors noted that deglobalisation will drive a shift towards companies with more localised supply chains. Developed market equities (32%) and infrastructure (24%) were seen as key asset classes likely to benefit from this trend. Additionally, 49% of global investors--especially those from North America (56%) and Latin America (53%)--indicated that they might seek more exposure to private markets to capture innovation in productivity-enabling technologies.
Commitments to net zero and active ownership
In the realm of sustainability, 56% of respondents stressed the need for tangible evidence of real-world outcomes as a key for engagement strategies, while 44% considered evidence of improved financial performance to be crucial. Corporate governance was highlighted as a top priority across all markets, with 71% of respondents prioritising it.
Support in tracking a path to net zero carbon emissions was cited as necessary by 51% of the surveyed investors, up from 37% last year. Of those surveyed, 50% have made commitments to reach net zero by or after 2050; however, only 29% have an implemented strategy to meet these targets. EMEA investors led in terms of commitment, with 39% implementing a strategy, compared to 17% in North America.
Regional variations
Jenny Mill, a climate change specialist at Schroders, noted that while there is a global need to decarbonise, commitments to net zero emissions varied by region. Among organisations, insurance companies (47%) were found to be most committed to reaching net zero by or before 2050, followed by pension plans (37%) and endowments and foundations (29%).
Kimberley Lewis, head of active ownership at Schroders, pointed out that issues for active ownership differ by region. While corporate governance was a universal concern (71%), climate change was more pressing for EMEA (68%) and Asia-Pacific region investors (53%). In contrast, human capital management was a priority for Latin America and North American markets appeared more focused on social issues.
Johanna Kyrklund, chief investment officer at Schroders, concluded that a renewed focus on valuations rather than speculative growth may be essential given the prevalent concerns about high inflation and interest rates.