Most investors convinced they can drive low-carbon energy transition: Survey

More than half of global investors feel they can significantly influence the clean energy transition through their investments, as the appetite for energy innovations and alternatives continues to grow despite prevailing market uncertainty, a survey of global institutional investors has revealed.

Just 17% disagreed that investors “could significantly influence the progress of the low-carbon energy transition with [their] capital allocations”, the survey, conducted by global investment management firm Nuveen, showed.

Investors, survey results showed, are adapting their portfolios to unfolding developments in the energy sector as well as increasing uncertainty in global markets (with nearly two-thirds believing the world has entered a new market regime that is reshaping how investors manage risk and return, while 80% believe world economies are bound to higher-for-longer interest rates).

More than half of respondents (57%) said they were seeking or are already exposed to alternative energy assets (for instance, in renewable, nuclear, and hydrogen).

Additionally, 51% expressed their intent to allocate to new infrastructure projects, including new energy storage/grids and battery storage. Electrification of transport or operations was also a major investment thematic for 39% of respondents.

Meanwhile, the appeal of carbon credits appears to be waning, attracting just 17% of investors.

“Investors clearly understand their influence, and see government policy and technical innovation as the biggest tailwinds for investments in the energy transition for the year ahead,” said Mike Perry, who heads Nuveen’s global client group.

“Thirty-nine per cent consider politicisation to be the biggest headwind, highlighting the importance of partnering with active managers who have robust experience sourcing and navigating the most attractive opportunities,” he added.

Nine out of 10 investors worldwide (and a similar number in the APAC region) were found to be focused on the energy transition in some way.

Of this group, the largest cohort (37%) were “keeping pace” with the energy transition, structuring portfolios to reflect the current energy mix in the economy. Nearly a quarter (23%) said they were “getting started” in the energy transition, while 19% hitting bare minimums, “doing what is needed to meet regulatory requirements”.

The smallest cohort, representing just 9% of investors, declared themselves as first movers in the energy transition.

Perry identified three clear themes dominating investors’ focus as the energy transition plays out:

• A “huge appetite” for exposure to energy innovations and infrastructure projects.
• Private credit and private equity being prioritised among growing allocations to alternatives.
• Investors holding portions of their portfolios in higher-quality, liquid fixed income instruments, “as a way to position themselves to take advantage of these timely opportunities”.

Growing uncertainty drives de-risking push, equities retreat

Coming off more than a decade of abnormally low inflation, consistent – if not superlative – growth, and a powerhouse Chinese economy, investors are now bracing for increased market uncertainty, increasingly moving to de-risk their portfolios.

Half of investors (50%) globally and in APAC said they plan to increase portfolio duration in 2024; this compares to just 39% in the previous year’s survey.

At the same time, the percentages of investors planning to increase “inflation risk mitigation” and “cash” have decreased compared with last year’s survey (from 64% to 41% and from 41% to 37% respectively).

“For liability-driven investors, higher interest rates and the resultant improvements in funded statuses represent an opportunity to de-risk portfolios by adding duration,” Nuveen said.

Further, it said, a stabilised interest rate has opened opportunities for investors to de-risk, moving away from equity markets towards high-quality public and private fixed income.

Compared with last year’s survey, significantly more investors are decreasing equity exposure (40% globally, and 44% in APAC) than increasing (28% globally and 37% in APAC).

Almost half of investors (48% global and 44% in APAC) say they plan to increase allocations to investment-grade fixed income, which according to Nuveen, “likely [reflects] investor expectations regarding a coming economic slowdown”.

More than one-third of surveyed investors (38%) have planned to increase allocations to private fixed income, where investment grade credit is the top pick.

About one in five investors also indicated that, over the next two years, they planned to increase allocations to public securitised debt (CLOs, MBSs, etc.; 22%) and below investment grade fixed income (high yield, broadly syndicated loans, etc.; 21%).

Continuing private market appeal

Investors are continuing to allocate to private markets, with 55% globally (and 59% in APAC) planning to increase allocations over the next five years. Within this segment, private credit and private equity allocations have emerged as top choices.

However, as Nuveen indicated, this shift to private markets is less pronounced than last year, where 73% globally (and 79% in APAC) indicated that they had planned to increase allocations to privates.

Some investors also are planning to increase allocations to private real estate (24%), commodities (22%), hedge funds (21%), private placements (19%), timberland and farmland (both 12%).

Public pensions in APAC are leading the way, with 72% planning to increase private investments over the next five years.

Nuveen’s annual EQuilibrium Global Institutional Investor Survey surveyed 800 institutional investors representing asset levels of more than US$500 million.