While allocations to sustainable investment strategies continue to grow, the average allocation in Europe is relatively low at around 23%. In Finland, a leading market, the allocation is 33%. “It is clear that even in the region where sustainable investing is most popular, the widespread adoption of ESG is still in its infancy,” noted the JP Morgan AM analysts. To assess and understand this momentum, they surveyed more than 1,000 European investment advisers to find out how they see the future, what they consider to be the most attractive opportunities and what factors are driving end-client behaviour.

A better understanding of the issues

Understanding environmental challenges and factoring them into portfolio decisions has become commonplace among European investment advisors to date.

When asked what drives asset allocation decisions, the survey found that client demand and aligning investments with personal beliefs were the most popular responses (with scores of 33% and 31% respectively).

The third most cited reason (28%) was the desire of end-investors to have a positive impact and a sense of urgency. Importantly, 27% of the investment advisors surveyed said they were motivated by the potential for improved risk-adjusted returns. 22% also indicated that “access to companies that can create long-term value” was an important factor.

In terms of the changing priorities of European investment advisors, the results showed that the traditional focus on the environment (the E in ESG) is shifting towards greater priority to social issues (the S). While environmental investments still dominate the European landscape, accounting for 54% of assets, previously marginal social criteria have grown to 19% of market share. Governance-based investments remained stable at around 20%.

Appeal of funds and ETFs

The survey also revealed that equities--the traditional main asset class for sustainable investment --are beginning to give way to multi-asset and alternative funds with thematic and impact objectives. This has resulted in a 2% decrease in the allocation to equities over the next five years, and a 2% increase in the allocation to multi-asset and alternative funds respectively.

In terms of the use of different investment vehicles, “change is afoot”, the survey pointed out. “Over the next 12 months, 50% of advisers will increase their use of active mutual funds for ESG exposure. This figure is expected to increase by 8% over the next five years. 51% of investment advisors plan to increase their use of ETFs [exchange-traded funds] for exposure to ESG opportunities next year compared to 43% currently.”

Notably, regional allocations, traditionally confined to the US and European markets, are opening up to emerging markets, “including China”. 40% of the advisors surveyed plan to increase their allocations to these countries over the next five years. 26% even plan to do so as early as next year.

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