Leaving aside the innumerable debates about the semantics and definitions of the evolving concept of sustainable and responsible investment, often called ethical, responsible, social or socially responsible in a multitude of overlapping and competing expressions, what is constant in this area is the emphasis on environmental, social and governance (ESG) issues. These are considered important criteria in the financial analysis and in the investment decision-making process, as they are thought to determine long-term investment performance. The most readily acknowledged expression, SRI, or socially responsible investment, continues to be used by Eurosif – the European Sustainable Investment Forum – to indicate a broader range of sustainable and responsible investments, encompassing all possible sub-sets.
“One of the consequences of the financial crisis is that investors now really want to know what is inside any investment. SRI has benefited from that, because SRI is about transparency,” says Matt Christensen, executive director at Eurosif. In 2003 the non-profit organisation compiled guidelines for the transparency of retail SRI funds, to which asset managers offering SRI investments can adhere on a voluntary basis.
Eurosif is now working on a project with the European Commission to make it compulsory for companies across Europe to publish in their annual reports the ESG risks they face and the ESG issues they are working on, says Mr Christensen. In countries like France and the Netherlands, this is already mandatory. This will contribute to increased transparency and better stock screening.
Investors want to understand whether the investments are more environmentally or more socially oriented, whether the product involves ethical exclusions or positive screening, such as best in class or theme funds, or it is about investing in a company to conduct an engagement campaign to improve its performance, he says. “We want to develop a common language in the SRI space at European level,” explains Mr Christensen.
The financial crisis has triggered demand for SRI products as investors have become painfully aware of the disasters that can be generated from focusing on the short-term and from not considering social, governance and environmental risks, says Mr Christensen. Those SRI products that had identified the social risk of investing in financials as a sector, because of the predatory lending, performed very well during the crisis, he says.
“Across the industry, most SRI funds continued to have net inflows during the downturn,” echoes Karina Litvack, head of governance & sustainable investment at F&C.
“The financial crisis brought into very stark relief what happens to markets and individual stock valuations when, as investors, we focus exclusively on micro aspects of the company’s performance and neglect macro-economic and systemic factors.” That the company has better sales than its competitors is important, she says. “But if you disregard the unintended impact of this activity on the health of the financial system, in the case of the financial crisis, you do this at your peril.”
People are increasingly concerned about the future, about leaving such an environmental or social debt to the next generation, she says. Some aspects of the non-sustainable activities are showing their devastating effects today. One example is climate change and its consequences on the environment and economy. Generally, the major problems around sustainable investing throughout the industry, and specifically in private wealth management, are a lack of knowledge and inadequate advice, says Ms Litvack. “While it is getting better in the institutional space because the consultants are starting to look at it more systematically, the fundamental problem with SRI is the lack of awareness and a general misapprehension on the part of advisers.”
Different ways in
There are various approaches to SRI investing, she says. Private investors can invest in thematic products, which are possibly higher risk, but they can also follow a much more conservative investment style. This can take the shape of a commitment to exercising leverage as an investor, the way institutions such as foundations or high profile families have tended to do, as they can put pressure on companies using their influence and size.
Similarly, individual portfolios managed separately can be pooled for the purpose of engagement or voting. “This is where private banks can have an enormous value added because they can provide individualised portfolios for their clients, but at the same time gather up all those funds into one single voice that influences companies for the better. I have not seen this yet, but that does not mean that it does not exist,” says Ms Litvack.
The European SRI market, estimated to be worth around €2,700bn, represents around 18 per cent of total assets under management in Europe but is still largely dominated by institutional investors, who account for 94 per cent of total assets. Retail and high net worth individuals contribute to only 6 per cent of the total SRI assets, but there are many variations across Europe; in Switzerland, the percentage of retail SRI assets is 50 per cent. That is clearly driven by high net worth (HNW) individuals’ interest in thematic investments, with clean energy and water as their preferred sustainable themes, according to a Eurosif study.
