Money managers under the microscope
SRI can find strength through unity
By Detlef Glow, Head of EMEA Research at Lipper. The views expressed are his own.
Sustainable investment, socially-responsible investment (SRI) and environmental, social, governance (ESG) approaches have been hot topics in the funds industry for what seems like a very long time. Hot, but not boiling.
One aspect which serves to cool it all down is that the steadily increasing popularity of such investments has prompted portfolio managers to try and differentiate themselves by applying a host of slightly different parameters for their analysis or using different names for their investment approach. It doesn’t help that the broad sector itself can be referred to in a host of ways too: Ethical? ESG? SRI? Sustainable?
This has created an expanding jungle of acronyms and names used within the industry, as well as an expanding collection of confused private investors, portfolio manager, analysts, journalists and other professionals.
A number of studies have confirmed that investors are struggling to make informed decisions as they attempt to build a coherent sustainable investment strategy.
In February 2009, a study by Union Investment asked 256 professional investors about their knowledge, preferences and perspectives regarding this arm of the industry. The main outcome was this: “Everyone is talking about sustainable asset management but as of yet it has not become firmly anchored in many portfolios of institutional investors such as banks, insurance companies and major corporations.”
Nevertheless, the European investment industry has tried in the recent past to attract fresh money by launching new active managed sustainability funds in emerging markets or linked to hot topics like green energy. There are also new exchange traded funds (ETFs) which track indices based on sustainable or ethical selection criteria.
Even if some of these developments have been driven by fashions in investment trends, these new products are in general a move in the right direction; investors do now have more choices to integrate SRI/ESG strategies into their portfolios. However, it will take more than just a few new funds to drive the development of sustainable investments further.
From my point of view, one of the most interesting questions to ponder is why, if everybody wants to invest in a more sustainable way, do the vast majority of asset managers not use sustainable selection criteria within their mainstream investment processes?
One reason could be the relative lack of information on the impact of these strategies in terms of performance and costs to their portfolios. On the other hand, there are a number of SRI/ESG strategies which have proven their ability to add value to regular investment management approaches.
Asset managers also raise the point that they don’t want to lose investment opportunities by placing restrictions on industry sectors which may impact their ability to generate alpha.
This issue could be fixed by using a best-in-class approach which allows the portfolio manager to invest in the most sustainable companies from all industry sectors. But from my perspective, it does not make sense to implement a sustainable investment approach which allows the fund manager to invest in harmful or unsustainable industry sectors.
There are already a number of asset managers, after all, who have successfully integrated sustainability selection criteria into their mainstream portfolios, and which do not look like they are facing issues on this.
There are obstacles, certainly, but there is also a clear route to take sustainable investment strategies from a periodically fashionable niche into a broad and commonly-used investment strategy — and it involves tackling that jungle of divergent approaches which has marked the industry’s evolution.
Most studies looking at investors’ views on socially- responsible investment indicate that there is a lack of transparency which stops institutional as well as private investors from implementing SRI criteria in their portfolios.
That implies that the biggest challenges for the industry are to educate clients and prospective clients, and also to focus on the development of common standards for SRI/ESG through associations like social investment forums (SIF) or multinational organizations like the UN-PRI.
Combine this commonality of approach with transparent products and you will attract new assets from investors who are still sceptical of the setup and selection criteria used for funds and uncertain about the evaluation methods which are applied to allocations in their portfolios.