More than four out of five institutional investors expect the proportion of their investments allocated to sustainable funds to increase over the next two years, citing strong investment performance as the top driver, according to a new survey released by Morgan Stanley, which also found that the vast majority of both asset managers and asset owners increasingly view sustainable investment options as a key driver in awarding investment mandates.
For the report, “Sustainable Signals, Institutional Investors 2025,” Morgan Stanley surveyed more than 950 institutional investors across North America, Europe and Asia Pacific, including 664 asset owners and 303 asset managers.
The survey found that institutional investors’ plans to increase allocations to sustainable investment has grown, with 86% of asset owners expecting the proportion of their assets allocated to sustainable funds to increase over the next two years, up from 79% in last year’s survey. Similarly, 79% of asset managers expect an increased proportion of their assets under management to be in sustainable funds, up slightly from 78% last year. Only 2% of assets owners and 3% of asset managers anticipate lower allocations to sustainable investments.
Notably, North American asset owners were the most likely to plan increased allocations to sustainable investments at 90%, compared with 82% of European and 85% of Asia Pacific asset owners.
Asset owners cited performance-related criteria as the most significant drivers of their plans to increase allocations to sustainable investments, with strong financial performance of sustainable investments or ESG strategies emerging as the top reason, reported by 22%, followed by 18% of asset owners who said that sustainable investing is becoming more mature as a strategy with an established track record.
For asset managers, the survey found that they expect growth in sustainable investing AUM to come from demand from existing clients for a higher allocation to sustainable investing, as reported by 42% of asset managers, while 39% expect to win new mandates due to their sustainable investing offerings, and 36% anticipate demand from asset owners allocating to sustainable investing for the first time over the next 2 years.
As investors plan to increase allocations to sustainable investing, the survey found that they also view sustainable investment options as a differentiator in awarding investment mandates. According to the survey, 90% of asset owners strongly (44%) or somewhat (46%) agree that sustainable investing options are a key differentiator in retaining or selecting asset managers, while 88% of asset managers similarly agreed that sustainable investing options are a key differentiator in retaining or winning asset owner clients. Additionally, 89% of asset owners strongly (43%) or somewhat (46%) agreed that they require external asset managers to have a sustainable investing policy or strategy.
Examining focus areas of investment, the survey found that investors most often cited renewable energy as a top priority sustainable investment opportunity, cited by 30%, followed energy efficiency at 28%, and climate adaptation and resilience at 23%. Notably, climate adaptation saw a sharp increase in its priority ranking, rising from 6th place in last year’s survey to third this year.
The growing focus on climate adaptation investment opportunities comes as investors increasingly view climate change as a risk to their portfolios, according to the survey, which found that more than three-quarters of investors expect physical climate risks to have a major impact on asset prices in the next five years, including 35% anticipating major pricing impacts that are widespread across the market, and 42% that expect some major pricing impact on a limited number of assets.
Similarly, more than half (53%) of investors surveyed said that they include climate resilience as a core part of their risk-return models when evaluating potential investments in physical assets such as infrastructure or real estate. North American investors were the most likely to include climate resilience as a core consideration, at 65%.
While the vast majority of investors anticipate increasing allocations to sustainable investments, the survey also found growing concerns around external factors impacting sustainable investing. Data availability and consistency remained the top spot as a “very significant” concern for investors about sustainable investing, cited by 47%, but rose significantly from 32% last year. Similarly, 43% of investors cited fluctuating regulatory guidance as a very significant concern, up from 28% last year, and 37% said that an uncertain political environment was a very significant concern, up from 29% last year.
Jessica Alsford, Chief Sustainability Officer and Chair of the Institute for Sustainable Investing at Morgan Stanley, said:
“In our latest global survey of institutional investors, the majority expect to increase their proportion of assets in sustainable funds – with financial performance and a maturing track record driving these allocations. Similar to individual investors and corporates surveyed in this year’s Sustainable Signals series, asset owners and asset managers anticipate growing impacts from climate risk in the coming years and are aligning their priorities to mitigate these challenges.”
Click here to access the survey.
