Investment in environmental and other socially responsible funds is still low. Fiona Rintoul asks why, and looks at recent developments in the sector, including green bonds and a company that gives up a portion of its profits.
Its proponents say that socially responsible investment (SRI) does not dent long-term returns and can even enhance them. Why, then, isn’t everyone doing it?
In her book on the “shareholder value myth”, Lynn Stout of the University of California, puts the proportion of all professionally managed assets managed by socially responsible funds of one sort or another at 12%.
She lays the blame at the door of “the ideology of shareholder value” and calls for “a new, more complex, and more subtle understanding of what shareholders really want from corporations”.
The fact that this does not yet completely exist is perhaps one reason SRI remains a minority pursuit. Another is that where such an approach does exist, the social and environmental benefits are not always readily apparent. Sometimes the benefits (including financial benefits) that would have accrued had a corporation behaved more responsibly become apparent after an unfortunate event, such as the 2010 BP oil spill in the Gulf of Mexico. But by then it is a bit late.
“We need to be better at communicating the environmental and social benefits of SRI,” says Eric Borremans, head of sustainable investments at BNP Paribas Investment Partners (BNPP IP). “That means having a report that quantifies these benefits.”
BNPP IP has developed metrics that do try to quantify the benefits of, for example, a reduced carbon footprint or helpful employment creation policies. As yet, however, there are no industry standards.
There is also a lack of clarity as to what SRI is. Is it green? Is it ethical? Or is it really just about investing in sustainable companies because they are the ones most likely to perform well? Every fund manager has his or her own answer. And the term “ethical” is, of course, also open to debate.
In terms of pleasing clients, the key issue is offering them flexibility to implement what they have in mind, says Mamadou-abou Sarr, senior equity index product strategist at Northern Trust.
Lack of benefits
With these issues in mind, Luxembourg-based Funds for Good has developed a new model whereby it acts as an intermediary with institutional investors for certain boutique and mid-size asset managers and donates 50% of its own profits to social projects.
“It’s not that people don’t want to invest in SRI,” says Nicolas Crochet, managing partner at Funds for Good. “People don’t invest in SRI because they haven’t encountered the kind of SRI that could convince them.”
Whereas with conventional approaches to responsible investing it can be “hard to see what the real impact of investing in an SRI strategy is”, with the Funds for Good approach, investors receive a tailor-made, audited annual impact report. They can also donate time, fees or money to the projects the company supports.
Funds for Good has clients in Belgium, Luxembourg, France and the Netherlands. Its main asset management partner is Banque de Luxembourg, which Crochet describes as “one of the most engaged banks in philanthropy”.
The company now hopes to add new strategies. But for this model to take off, others would need to copy it. Just how many institutional sales people there are with Crochet’s commitment to philanthropy remains to be seen. Even within the SRI sector, people tend to get twitchy around words such as “ethical” or “green”.
“People in finance are quite hard-nosed,” says Steve Triantafilidis, head of the global responsibility team at Vontobel Asset Management, a multi-boutique that has a strand focusing on sustainable funds and thematic funds in the areas of new power, future resources and clean technology. “They don’t want to be seen as green activists but, in reality, a lot of people are concerned. I’ve had very constructive dialogue with CEOs that I wouldn’t have had five years ago.”
That’s why SRI fund managers tend to emphasise the financial arguments in favour of their products. But the truth is that while studies abound as to the relative performance of SRI and non-SRI funds, none is conclusive.
“In all honesty, the jury is still out,” says Stuart Kinnersley, chief investment officer at Nikko Asset Management Europe. “There is little empirical evidence to suggest that SRI funds perform better than other vehicles.”
Lynn Stout suggests people would invest in SRI funds even if they lost a little performance by doing so because investors are no less “prosocial” than anyone else. But they would first have to be able to see them making an appreciable difference.
That may be so for long-term investors and Triantafilidis may be right when he says that “companies with a sustainable business model will generate better returns over time”, but it remains the case that many short-term investors – or perhaps better put, traders – couldn’t give two hoots about a company’s sustainability.
“Traders who don’t know what a company does could account for 40-50% of all trading,” concedes Triantafilidis. “The amount of trading that goes on compared to 20 to 30 years ago is, in my view, ridiculous.”
Short of a complete rethink of global capitalism, there is not much that can be done about this. The only thing one can do is look at positive developments that go in the other direction.
Karina Litvack, head of governance and sustainable investment at F&C Asset Management, points to initiatives such as the UK Stewardship Code and South Africa’s Code for Responsible Investing.
“It’s voluntary at the moment,” she says, “but they have said that if people don’t follow it, they will make them.”
Then there is the growing number of signatories to the UN Principles of Responsible Investment (UNPRI). “In parallel to short-term trading growing, there are a number of asset owners who have signed up to the UNPRI,” says Borremans. “There are more than 1,000 signatories worldwide.”
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