Market News

 September 14, 2006
Responsible investment tops €1 trillion

 London, UK (GLOBE-Net) -- A just released study shows that socially and environmentally responsible investments across Europe now exceed the one trillion Euro mark. The study also reveals that asset managers have developed a host of responsible investment strategies to meet rising demand for extra-financial analysis.

The 2006 European SRI Study was conducted by the European Social Investment Forum (Eurosif), which is made up of national social investment organizations across Europe.

The study shows tremendous growth in responsible investment, defined by Eurosif as combining "investors' financial objectives with their concerns about social, environmental and ethical issues".

The trillion-dollar investment represents 10-15 percent of the total investment in funds in Europe, and is an increase of thirty-six percent since the research was first conducted in 2002.

The research indicates that the key drivers of this growth are: the increased credibility of the case for responsible investment analysis among the financial community; financial services regulation that requires more transparency and incorporation of social, environmental and ethical issues; and growing use of responsible investment strategies, such as engagement and integration of non-traditional risk assessment, by fund mangers.

The use of responsible investment-linked strategies has stretched beyond those investors with specific mandates, the report notes, and is now a part of many purely profit seeking approaches.

European responsible investment is dominated by institutional investors, who represent 94 percent of the market. Pension funds are increasingly demanding that social and environmental factors are integrated into asset management decisions.

Traditionally, responsible investment managers in Europe have focused on social, environmental and ethical (SEE) considerations, but have expanded to include governance issues, reflected by the acronym for environmental, social and governance (ESG) factors that is now more commonly used in the mainstream.

However they are described, a number of methods are used to incorporate these factors into investment decisions.

Simple screening, in which investments that support industries such as nuclear arms, tobacco or human rights violations are excluded from portfolios, was one of the first applications of responsible investment. Today, it remains in use by a small number of institutions, but because it is easy to apply, it still represents 6 percent of the European pension market. Strategies of choice for the mainstream financial community are engagement and integration, reports Eurosif.

Engagement, often termed shareholder activism, represents dialogue between asset managers and key companies on practices of concern. Sometimes extending into voting practices, and often including requests for disclosure or risk management plans for issues such as climate change, this method is dominated within Europe by the United Kingdom.

Integration is a more widely interpreted responsible investment strategy, and involves the consideration of environmental, social, and governance risk factors into traditional financial analysis. It is often this integration that drives engagement, as financial managers seek to mitigate perceived risks in these areas.

The United Kingdom leads in this field, but is being supported by the strong actions of some of the leading institutional investors in Europe, according to the Eurosif report. A broad selection of integration strategies are used by financial managers, reflecting a mainstream adoption of certain methods.

For the most part, responsible investment managers see engagement and integration as mainstream components of responsible investment because they are compatible with managers' concepts of fiduciary duty, and fit well with traditional financial analysis, reports Eurosif.

In fact, recent studies have concluded that not only are environmental, social and governance factors compatible with fiduciary responsibility, but that many jurisdictions actually require these issues to be part of the investment decision process.

That was the conclusion shared by Paul Watchman, a Partner at leading international law firm Freshfields Bruckhaus Deringer, at GLOBE 2006. Mr. Watchman contributed to a landmark legal study for the United Nations Environment Program Finance Initiative, in which he concluded that "a number of the perceived limitations on the integration of ESG issues into investment decision-making are illusory. Far from preventing the integration of ESG considerations, the law clearly permits and, in certain circumstances, requires that this be done. This legal interpretation has far-reaching implications for the institutional investment community worldwide."

The evaluation of environmental, social and governance risk factors has also been shown in recent years to have a material, financial impact on investment returns, and mainstream financial managers have begun to take these issues into account as a result. While Europe is definitely leading the way in this regard, North American and Asian institutional investors are also beginning to take action. The launch of the UN Principles of Responsible Investment, which have now been adopted by some of the world's largest investors, representing US$2 trillion of assets under management, is a clear sign of this.

See article: UN Principles for Responsible Investment launched

As the Eurosif study notes, interest in the responsible investment field continues to 'widen and deepen', and the mainstreaming of certain broad principles continues to impact financial markets around the world.

The Eurosif study can be found, here