About 6% of all European sustainable responsible investment (SRI) assets are held by retail investors, even though savers in France and the UK, for example, say they believe environmental, social and governance (ESG) factors are important when investing.
With the exceptions of Belgium and Switzerland, the retail demand for SRI is still weak; institutional investors are the key growth drivers of the industry.
One of the challenges is that SRI covers a range of investment approaches, which can lead to confusion.
There are also significant differences in the terms of preferences for certain SRI and ESG approaches on a country level. One explanation is that the innovative nature of this relatively young industry creates challenges around terminology.
Some ESG-themed funds, for instance, might intentionally seek to generate positive ESG externalities by investing in certain activities. Whereas integrating ESG factors into traditional financial analysis is mainly motivated by risk mitigation and identification of opportunities.
Nevertheless, if motivations and processes are very different, both have the potential to contribute, in different ways, to building a more sustainable world.
So, what can be expected? The demand for SRI will likely remain driven by select institutional investors and high-net-worth individuals, and is set to grow further.
Investment consultants should clearly be more proactive in educating their institutional clients on the merits of taking ESG factors into account.
By failing to do so, they expose their clients to long-term risks that those might pay sooner or later.
The UK Institute of Actuaries recently stated that “a healthy defined benefit pension scheme could become insolvent within 35 years solely as a result of the limitations to growth as modelled”.
The SRI industry will have to make a stronger effort around transparency and education.
The European SRI Transparency Code, for example, is a voluntary initiative aimed at providing centralised, retail-friendly, comparable information about the SRI characteristics of a given SRI fund.
More than 500 European SRI funds have adopted the code, about half of the broader European SRI fund offering. The code is supported by several national trade bodies and label providers. Further progress needs to be made to ensure wider adoption by the industry and by retail investors. As evidenced by surveys quoted above, there is a latent retail demand for such products.
At a time when Europe wants to promote smart, sustainable and inclusive growth, there is no doubt that legislative developments, both European and national, will further foster the growth of the industry.
Eurosif has been publishing a European SRI Market Study for 10 years. The latest edition, published in late 2012, shows that the SRI market is growing.
All the SRI strategies surveyed between the end of 2009 and the end of 2011 show double-digit growth rates, exceeding the growth of the broad European asset management market, which grew at 7.8% in the same period.
This shows continuous interest of investors for ESG, despite, or maybe thanks to, the current market turmoil and economic slowdown.
A growing body of academic research demonstrates the materiality of ESG factors on corporate financial performance and that SRI approaches do not undermine long term financial returns.
Resource scarcity and climate change are starting to be well-recognised investment parameters.
Steady growth of the UN-backed Principles of Responsible Investment signatories is also a sign of growing recognition of the value of integrating ESG factors into traditional investment approaches.
François Passant is Executive director at the EuropeanSustainable Investment Forum (Eurosif)
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