20 January 2023 5 minute read

Decision makers at official institutions share their views on asset allocation, sustainability and risk in their real asset investments.

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Aviva Investors Real Assets Study 2023

Although official institutions (OIs), consisting predominantly of European- and Asian-based organisations, constituted only five per cent of our survey, they command large pools of capital, with almost two-thirds reporting assets under management of over €20 billion. 

OIs are also significant investors in real assets. Almost one-third (31 per cent) have 20 per cent or more of their total portfolios invested in the broad asset class, a higher proportion than the wider survey population (20 per cent). Indeed, 69 per cent maintain real assets weightings of ten per cent or more versus 53 per cent of our overall survey population.

Diversification dominates 

The diversification benefits bestowed by real assets are a major attraction

For OIs, the diversification benefits bestowed by real assets are a major attraction. Eighty-one per cent of organisations reported diversification was one of their main reasons for holding real assets, up from 65 per cent three years ago.

Meanwhile, faced with elevated inflation globally, a need for inflation-linked income has risen in importance for OIs, from 31 per cent three years ago to 46 per cent today. The positive ESG impact potential of real assets has also developed into one of the main motivations to hold real assets, climbing from 15 per cent to 42 per cent.

What is your primary reason for allocating to Real Assets today, and what was, or would have been, the most important driver three years ago? (per cent)

OIs are looking to build their real assets exposure

In common with the wider survey, future OI demand for real assets looks solid. Sixty-nine per cent expect to build their exposure over the next two years; just four per cent anticipate cutting their real assets weightings. 

Reviewing the relative popularity of different real assets strategies, real estate equity (28 per cent) was most favoured by OIs. Infrastructure equity allocations followed in second (14 per cent), with private credit (12 per cent) completing the top three strategies.

The scale of capital deployed makes direct investment by far the mechanism of choice for OIs looking to access real assets, with 77 per cent preferring this approach. Multi-asset pooled funds (46 per cent) enjoyed sizeable support, most notably among Asian institutions (79 per cent).

What is your preferred way of investing in Real Assets? (per cent)

Pro-sustainability attitudes widespread 

Exploring attitudes to responsible investment, 77 per cent agreed their organisation had a responsibility to invest sustainably. Support for this statement was highest among Asian institutions (89 per cent).

OI respondents identified industry pressure as their principal reason for allocating to sustainable real assets

OI respondents identified industry pressure (62 per cent) as their principal reason for allocating to sustainable real assets. They also cited regulatory pressures and a need to align with organisational values (both 57 per cent) as key reasons behind their embrace of sustainable real assets investment.

Material demand for ethical and decarbonisation-based strategies 

Although OIs reported a clear preference for strategies that prioritise financial returns while integrating ESG factors (62 per cent), the support level for such strategies was meaningfully lower than for the overall survey (79 per cent). Meanwhile, OIs expressed significant interest in net-zero-based approaches (50 per cent) and strategies with a positive, measurable impact against a specified ESG objective (50 per cent).

A manager’s ability to evidence impact and risk was notably important as was the quality of the ESG integration process

Staying on performance-related matters, 92 per cent of OIs reported that proven investment performance was vital when choosing an asset manager for a sustainable real assets mandate. A manager’s ability to evidence impact and risk was notably important (69 per cent), as was the quality of the ESG integration process (69 per cent).  

Looking at individual sustainable real asset approaches, renewable infrastructure attracted the greatest interest from OIs. Over one-half (54 per cent) of institutions anticipate adding to their existing exposure to this area, above the overall survey reading of 44 per cent — interest in renewable infrastructure was highest among European (56 per cent) respondents. Elsewhere, there was material demand from OIs for strategies focused on decarbonising existing assets (50 per cent), again most notably among European organisations.

Many OIs are already on the net-zero journey

OIs reported the same level of commitment to net-zero carbon emission targets as our wider survey cohort

OIs reported the same level of commitment to net-zero carbon emission targets as our wider survey cohort: 50 per cent have already made a pledge, with 15 per cent already reporting on their progress. Meanwhile, 15 per cent have no net-zero commitment and have no intention to make such an undertaking, a lower figure than the 24 per cent for the overall survey population. 

Support for net-zero policies was higher among Asian OIs (67 per cent) than European OIs (44 per cent), with a further 44 per cent of European institutions investigating the feasibility of adopting a net-zero policy.

How confident are you in knowing what actions are needed to meet long-term net zero and sustainability commitments within your real assets investments? (per cent)

High valuations are the biggest risk when investing in sustainable real assets

OIs regarded high valuations as currently the biggest risk when investing in sustainable real assets

Lastly, OIs regarded high valuations as currently the biggest risk (62 per cent) when investing in sustainable real assets, with Asian organisations being the most worried about excessive valuations. Over one-half (54 per cent) of respondents highlighted greenwashing as a cause for concern.

Download the full study

PDF 3.4 MB 34 pages

The Real Assets Study 2023 provides investor insight on asset allocation, risks and opportunities, and preferred routes to market, as well as a deep dive into attitudes towards sustainable real assets – covering everything from net-zero targets to whether investors see a trade-off between achieving ESG impact and financial returns.

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23 Feb 2023 14:00 GMT 60 minutes

Join members of the Real Assets team as they discuss the findings of the Real Assets Study 2023 and also provide an overview on the macro environment, as well as discussing where they are seeing opportunities. The webcast will be hosted by IPE.

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