Magazine Issues » Dec 2018-Jan 2019

SPONSORED FEATURE: A better global citizen

SRI investing powered to the top of asset management agendas in 2018. Jersey Finance research suggests the trajectory in 2019 will be just as steep.

Why does socially responsible investment (SRI) make sense for investors? Responsible investment – including environmental, social and governance (ESG) investing – is as much a risk management tool as it is an investment opportunity. Perhaps even more so.

Monitoring the reputational risk carried by portfolio companies is a major factor in the growth of investment strategies with an ESG element. In the private equity sector, Robeco Private Equity recently showed that general partners are increasingly strengthening the integration of responsible investment themes into their investment, monitoring and reporting processes and this has correlated with relatively low risk in portfolio companies.

But whether it is for returns or for risk, 2018 showed evidence of the further ‘mainstreaming’ of responsible investing. More investment managers across traditional and alternative asset classes signed up to the UN Principles of Responsible Investing, and fund launches with a responsible investment theme continued apace.

The momentum towards higher levels of SRI is reflected in Jersey Finance’s ‘Socially Responsible Investment Survey’. Jersey Finance commissioned the survey to see whether the mainstreaming of responsible investment was likely to continue throughout 2019.

Jersey_Finance_tables_oneThe majority of respondents (60%) said they had seen “significantly more” interest in SRI throughout the past year, and 31% reported “more interest”. Only 1% reported significantly less interest and 8% said interest had been static, but the figures are strong enough to suggest SRI will still be in a fertile environment through 2019.

Certainly this is the expectation of our survey respondents for the following year: nearly 60% expect there to be more interest in SRI in 2019 and 34% said they expected interest to be “significantly” higher.

“Many fund administrators and managers in Jersey say impact funds are a priority for their overall strategy,” said Karolina Pilcher, senior strategic projects manager at Jersey Finance.

“The topic is also becoming critical in our private wealth management industry, where a new generation of people are inheriting wealth and want to re-invest it to do good in the world,” she adds.

Institutional investors are the main types of investors expressing interest in SRI – overwhelmingly so, with 73% of respondents reporting interest from these organisations. Retail investors ranked second, accounting for 13%.

Yet the percentage of respondents who reported interest among alternative investors was zero. This could, of course, be down to a low number of alternative investors, or their advisers, taking part in the survey.

“It is not surprising that institutional investors lead this, but many of our members who are active in private equity and real estate are looking at impact investing,” says Pilcher. “One administrator, for example, is expecting to at least quadruple the amount of capital invested into impact investing over the next four years.”

She adds: “While we acknowledge that institutional investors increasingly fuel this market, research also finds that the sector is opening up more to retail investors and alternatives.”

Geographical drivers
Not surprisingly given the large European make-up of the survey cohort, Europe was seen as the market generating the most demand for SRI product.

Jersey_Finance_tables_twoThe US scored second, and with only 7%. This is likely to be because demand in the US is led by millennials rather than by major asset owners. A 2016 Bank of America Merrill Lynch report found that millennials had the highest proportion of assets invested in ESG or ESG-oriented strategies in the US and that they had the greatest interest in adding to these strategies.

Again Europe scores highest when respondents were asked where they felt SRI investments were most likely to be targeted. Yet Asia, Latin America and Africa also trumped the US.

One possible explanation for these emerging markets to score so relatively highly could be the SRI investment themes that link to these countries.

Although environmental investments were the most attractive areas of SRI (with a 92% score), social themes such as child poverty and education also rated strongly. “This is consistent with our wider research that found the USA and Western Europe are the biggest exporters of pure impact investing and net importers are Africa, Asia and South America,” says Pilcher.

Within Jersey itself, Jersey Finance’s own research has found that more than 30 socially responsible investment funds are administered there and that the figure is expected to increase.

“Our research indicates that SRI will continue to grow across all strategies,” adds Pilcher. “This is because of a demand for businesses to be more transparent and, generally, to be better global citizens.”

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