Socially responsible investing (SRI) used to be a fringe concern, but large investors are increasingly adopting investment strategies that include SRI analyses. This is challenging European corporations at the level of their core strategies.
Recent performance figures suggest how SRI is gaining a hold in asset markets. For example, during last year’s bear market when many investors were pulling out of stocks altogether, SRI funds were among the best performers worldwide in terms of attracting new money. SRI funds attracted a net $1.8bn, while conventional stock funds lost a net $27.6bn.
Fund managers say investors increasingly cite the perception that SRI investment managers tend to do more homework on the companies they invest in, making their funds a better long-term investment on pure financial return grounds. Some SRI fund managers also claim a deeper reason for the long-term health of their investments, saying that companies that adhere to SRI principles are intrinsically more long-term in their outlook.
SRI is by no means new in Europe, however. Some investors have long used the negative portfolio screening approach to stock picking, which simply means excluding certain businesses from their portfolios — typically companies with operations in tobacco, alcohol, weapons and gambling. But now some European fund managers are talking of a shift from exclusion to engagement, whereby fund managers spend more time talking to the leadership of companies about their performance on SRI measures.
This shift in approach on the part of funds that have previously stuck to conventional stock analysis tools is being fuelled by investor demand, say fund managers. Poor profit and stock price performance on the part of even the biggest European companies is leading many investors to look again at the principles that underlie the businesses they invest in. But it is a largely silent process. According to Craig Mackenzie of the Insight Investment team at European retail bank HBOS, fund managers are still approaching companies confidentially, fearing if they become too publicly aggressive they may lose access to top decision-makers.
But while fund managers may prefer to engage with companies privately, at the retail level investor awareness of SRI issues is also growing due to the increasing public availability of information on corporate SRI profiles. For example, Ethical Investment Research Services (www.eiris.org) now profiles some 2,500 companies in Europe and worldwide on environmental, stakeholder and ethical issues, and rates institutional investors on their performance on these issues.
European banks are also global leaders in adopting SRI principles for direct investment. ABN Amro, Barclays and WestLB have joined Citibank (US) in adopting SRI guidelines created by the International Finance Corporation (an arm of the World Bank), which include issues ranging from environmental assessment to the treatment of indigenous peoples and forced labour. Under the IFC rules, known as the Equator Principles, the banks undertake not to provide project finance for borrowers who will not comply with the IFC’s environmental and social standards.
For both lenders and investors, there appears to be a new perception in Europe that SRI can be commercially important analysis.
Industry analysts estimate that the SRI sector has doubled in size every year for the past few years. Despite this, SRI funds still only represent around 1% of the managed funds of the UK plus the euro area, according to Innovest Strategic Value Advisors. However, these figures may hide the true impact SRI analysis has on both investment decisions and corporate strategies. Matthew Kiernan, CEO at Innovest Strategic Value Advisors, has recently argued that SRI analysis has a tendency to become ever-less visible as it is taken up by the mainstream of the financial sector. It will only become completely successful when it ceases to exist altogether he says.
Published in Country Monitor 02 Jun 2003