Rising inflation, geopolitical instability impact investment focus

Despite expectations of declines a year ago, inflation and geopolitical uncertainties continue to be major concerns for investors

Rising inflation, geopolitical instability impact investment focus

Schroders' annual Institutional Investor Study highlights a shift in investor preferences towards private assets and sustainability as they navigate the challenges posed by rising inflation and geopolitical instability. The annual research, conducted for the UK market, surveys 770 investors spanning 36 regions and managing a total of US$34.7 trillion in assets.

Despite expectations of their decline a year ago, inflation and geopolitical uncertainties continue to be major concerns for investors. The study reveals that more than half of investors anticipate that geopolitical instability and increasing inflation will have the most influence on portfolio performance in the coming year.

The persistence of these concerns is linked to macroeconomic factors such as decarbonization, demographic changes, and deglobalization, which have the potential to sustain high inflation rates. These global trends are also prompting investors to reevaluate their portfolio allocations.

In response to the trend of deglobalization, over 50% of respondents predict that investors will increasingly favor companies with localized supply chains. Developed market equities (32%) and private equity (23%) are seen as promising investment opportunities moving forward.

Furthermore, 65% of respondents believe that investing in private assets can offer deeper diversification, driving a third of global investors to consider increasing their allocations to this asset class in the next two years.

“Investors have grown less certain. We think investors are right to exercise caution, but should also view this disruptive environment not as merely a temporary phase but the emergence of a new era altogether,” said Nils Rode, chief investment officer at Schroders Capital. “What is clear from the study results, is that many investors continue to be drawn to private assets as a means to engage with the evolving macroeconomic landscape, as well as to add resilience to portfolios.”

Energy transition

Investors are placing emphasis on the transition to a net-zero economy. The majority (67%) believe it is likely that energy transition will generate investment opportunities, particularly in innovation.

Approximately half of global investors see infrastructure and renewables as the most suitable asset classes to capture the potential presented by decarbonization trends in the medium-term. With green technology advancements favoring infrastructure, 41% anticipate an increase in allocations to this sector within the next year.

More than half of respondents aim to actively tap into investment opportunities related to energy transition and technological advancements through greater exposure to private assets.

When asked about investing in sustainability and impact strategies, two-thirds express interest in exploring new sectors like nature-based solutions and green hydrogen for portfolio diversification and entry into new thematic and asset areas.

Approaches to sustainable investing

Investors are adopting various approaches to sustainable investing. The study found that investing “thematically” and a focus on impact investing are becoming increasingly popular among institutional investors.

Investors believe that sustainability and impact strategies contribute to their long-term financial objectives and 43% prioritize making a positive impact on society and the environment. In particular, infrastructure (44%) and natural capital and biodiversity (41%) are identified as well-suited asset classes within private assets to achieve sustainability and impact goals, with this focus growing over longer investment horizons.

“Sustainability is a complex and broad topic. It is also fast-changing, whether that be through new research, expanding data availability, regulation or government action,” said Andy Howard, global head of sustainable investment at Schroders. “In this landscape, we cannot stand still.”

Challenges in impact investing

60% of investors believe that the ease of measuring and understanding impact is the most critical criterion when considering investments with a focus on impact. Over half of respondents identify a lack of standardization in measurement processes, tools, and metrics as the main obstacle to investing in private asset strategies centered on sustainability.

Mixed support for net zero targets

While half of respondents have committed to achieving net-zero portfolios, 21% have no intention of doing so. EMEA-based investors exhibit the greatest commitment to delivering net zero by or before 2050, with 39% implementing strategies with interim targets. In contrast, most respondents with no commitments are based in the US (44%).

Across all markets, there is a consensus that more support is needed in measuring and tracking net-zero pathways. Approximately 51% believe their organizations require more support in measuring and tracking their net-zero progress. Additionally, 49% of investors emphasize the need for greater consensus on frameworks and methodologies to measure net-zero progress and meet their commitments.

“Now in the seventh year of conducting this study, we are starting to see some new trends emerging as investors continue to grow and evolve their approach to sustainability,” Howard said. “This year’s findings highlight that institutional investors are increasingly focused on the thematic exposures and impacts of their investments. Clients want to take a more nuanced approach to sustainable investing than in the past.”