ESG front and centre as investors prep for $275t energy expenditure

Institutions have already kick-started efforts to restrategise amidst global shift.

The current landscape is radically different from the last three decade’s global investment scenario, a study by McKinsey & Company on senior executives from 40 of the world’s top pension and sovereign-wealth funds revealed.

After a long period of steady returns and continuous growth, today’s environment is challenged by a global pandemic, war, energy crisis, and global inflation amongst others.

Resource and energy systems were identified by the study as the most salient domain that defines the current era, with all investor respondents unanimously agreeing that it is a defining factor for their strategies. Institutional investor executives are anticipating having to finance about $275t in capital expenditure on physical assets for energy and land-use systems from 2021 to 2050.

Most executives also posed unease about how challenging it will be to transition and reach net zero, especially in the presence of stakeholders who are vocal in objecting to net-zero strategies. A North American CEO particularly pointed out that simply divesting from high-emitting assets will not suffice. Others are worried about the possibility of a further strain on global energy markets due to the green transition.

Shift on purpose

Because of the unprecedented pace at which global scenarios are shifting, institutional investors need to be more adept at change. And amongst the areas they should focus on is their purpose.

Constantly delivering returns to their beneficiaries remains important, but the current economic landscape has also shed light on the importance of environmental and social considerations, particularly when it comes to climate change. From the study, one executive was quick to mention the similarity between long-term investing and sustainable investing.

In terms of social considerations, more than 25% of the institutions covered in the research have already committed to improving diversity within their ranks in efforts to develop their strategies. Others have also launched social-impact investment programs, whilst others put extra efforts on social factors in their portfolios.

This new era for institutional investors and executives has been proven to change the status quo for most companies, shifting their focus not only to their purpose, but also to their portfolio, and proficiency.