Institutional investors are increasingly anticipating growth in sustainable investing, according to a survey of more than 900 institutions that currently engage in this investment segment, or plan to.

Morgan Stanley’s ‘Sustainable Signals’ study highlights that 86% of asset owners and 79% of asset managers expect the share of assets in sustainability focused funds to increase over the next two years.

Asset owners reported that their optimism is largely driven by two factors: the strong financial performance of sustainable investments, and the growing maturity of their track record. For asset managers, growth is expected primarily via increased allocations from existing clients, along with new mandates and first-time assignments.

“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,” says Jessica Alsford, chief sustainability officer and Chair of the Institute for Sustainable Investing at Morgan Stanley. “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.”

Despite the bullish outlook, concerns are mounting with respondents flagging issues like data availability and consistency, regulatory clarity, and geopolitical shifts as “very significant” risks and 38% rated concerns of this nature as very significant, compared to 25% in the previous year.

The survey further found that both asset owners and managers view sustainable investment options as key differentiators when awarding mandates, with more than 80% in both groups considering sustainability a crucial component of risk management.

Over 75% of institutional investors expect physical climate risk to have a “major impact” on asset prices in the next five years, and more than half now treat climate resilience as a core feature of their risk-return assessments.

Regional investment priorities remain consistent; energy efficiency and renewable energy are still top-ranked, but climate adaptation has surged to third place (up from sixth in 2024).

As firms and institutions increasingly integrate environmental, social and governance considerations into their investment models, the results from Morgan Stanley’s study point to sustainable investing moving firmly toward being a mainstream imperative, not just a niche strategy.