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January 17, 2010 9:16 am
Green, social and ethical funds in Europe have grown considerably in number and size over the past year, in spite of the fallout from the financial crisis. Assets under management rose by 9 per cent a year to €53bn (£47bn, $77bn) by the end of June. Some say this proves socially responsible investing (SRI) is more than a fashion. Yet SRI remains a niche area with SRI assets reaching a mere 1.11 per cent of total assets in Ucits funds this year.
In the FT (November 27) Al Gore and David Blood called for “sustainable capitalism” to guide investors to think more long term and responsibly. Why don’t investors focus more on sustainability and the long term, they asked.
We think part of the answer lies in the lopsided relationship between SRI and risk. SRI is often considered a non-financial overlay to the investment process. It seeks to protect the investor from making unethical, socially undesirable or environmentally unfriendly investments. Sustainable investment, however, has an investment return focus that regards sustainable development as an opportunity to invest based on a set of financial and non-financial criteria. These, therefore, are two very different animals and SRI may be holding back sustainable investing.
SRI is likely to become extinct either because its core practices prove truly relevant and are, in time, adopted by mainstream investors; or SRI does not pass the test and turns from a niche market into an ever more marginal concept. If that happens, SRI will be, at best, a PR exercise for institutional investors.
Prevailing SRI evaluation practices too often depend on screening methods, which may be successful at identifying shareholder exposure to unsustainable or otherwise undesirable practices, but seem too limiting and inept at capitalising on the sustainability drivers that change markets and society. Such screen-based methodologies appear to view SRI as a set of potential liabilities, which misses the whole point: sustainability is a key investment opportunity, more often than not, a return driver, and not – on balance – a liability.
World leaders in Copenhagen last month failed to commit to steps that could eventually have reduced the risk of investing in sustainability. Equity markets did not seem surprised by the failure. Much more value is being attached to local and national government initiatives that are under way and should provide the legal and institutional framework that mainstream investors need.
However, even in the absence of a complete framework, there are opportunities to invest in sustainable development trends. It is crucial that mainstream investors look beyond the narrow emotionally led drivers attached to the ethical undertow of SRI and explore sustainable development from a broader perspective.
Integrating externalities, such as climate change, or social standards, offers sophisticated investors differentiating opportunities. Furthermore, externalities, once they become part of the economic model or business equation, will affect most companies one way or another, some offering a new opportunity while others could pose a threat to the business model. Judging by the amount of corporate policy-making that abounds, sustainability is evolving towards a performance driver at boardroom level. Investors should follow suit.
Sustainable investing can materially contribute to performance and therefore should not be confined to the generally riskier world of clean-tech and renewable energy. Perhaps one of the more widely held misconceptions is the notion that sustainable investing is synonymous with green or clean tech investment.
Clean tech is generally a higher risk strategy that invests in changes to the energy mix and resource utilisation, whereas sustainable investment seeks opportunities for mainstream investors and appeals to a risk profile in line with the benchmark.
It is up to mainstream investors to break the self-proclaimed monopoly of SRI on sustainable investment. This is likely to contribute to the investor’s financial bottom line and simultaneously deliver higher societal returns.
Willem Appel is CEO of Roodhals Capital; Marjan van den Belt, PhD, is ecological strategy consultant at Roodhals Capital; Wouter Scheepens, partner at Triple Value Strategy Consulting
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