The emergence of new types of SRI strategy is a major factor in driving the market as Eurosif's 2010 European SRI study highlights. Nina Röhrbein reports

The European sustainable and responsible investment (SRI) market has almost doubled in size over the last two years, an increase which can largely be attributed to the diversification of SRI-driven asset allocation into areas such as fixed income and newer SRI strategies. According to the 2010 European SRI Study by the European Sustainable Investment Forum (Eurosif), which covers 19 countries (including for the first time the Baltic states, Poland, Greece and Cyprus), the market stood at €5trn of invested assets at the end of 2009, a sharp increase on the €2.7trn from the 2008 report despite - or indeed maybe even because of - the financial crisis.

"For many investors the financial crisis has made SRI more legitimate because in essence it is about long-term investment and transparency," says Matt Christensen, executive director at Eurosif.

SRI traditionally has been an equity only story - but not any longer. The new report shows that much of the growth took place in other asset classes, primarily bonds. For the first time, fixed income has overtaken equities in terms of the assets invested. At end-2009 bonds made up 53% of SRI assets under management, up from 39% in 2008, while the European average of SRI equity investment fell from 50% in 2008 to 33% in 2009.

Microfinance funds have also begun to generate interest from SRI investors. Eurosif predicts microfinance and other alternatives will grow quickly as investors demand integration of environmental, social and corporate governance (ESG) criteria into more diverse areas.

"The innovation of SRI strategies has also boosted the growth of the market," says Christensen. "More institutional SRI investors have taken an integration approach over the last two years; they have gone beyond negative screening and started to integrate key ESG risks into their fund management, which can potentially lead to early identification of alpha opportunities."

Additionally, new SRI players often use the integration approach as a first step into SRI. But Christensen admits that measuring such an approach is difficult.

Other drivers behind the growth of the market are the increasing number of signatories to voluntary initiatives such as the UN Principles for Responsible Investment (UNPRI) and legislative changes. Seven EU countries now have regulations in place that touch upon SRI: Austria, Belgium, Germany, Italy, Norway, Sweden and the UK. In Denmark, the law is more advanced, as the statement of investment principles requires investors to disclose if and how they apply ESG criteria to their fund management, if they are not a UNPRI signatory. Spain is in the process of introducing requirements to its existing law.

"The EU closely watches the individual developments of member states and in the near future we are likely to have an EU-wide law on transparency and responsible investment," says Christensen. "The more policy moves towards either long-term orientation in the investment field or the integration of ESG criteria at a sector level through disclosure, the more this will impact SRI in a positive way. However, it would have to be legislation that makes SRI more than just a box-ticking compliance risk exercise."

The biggest European institutional SRI markets in terms of assets under management are France, the UK, the Netherlands and Switzerland, ahead of the smaller Scandinavian markets. The German, Italian and Spanish markets need to catch up, says Christensen.

"Poland is the biggest SRI market in Eastern Europe with €1bn in assets under management," he says. "Other markets, such as the Baltics, have started to have investment go into them."

One of the big topics dominating Europe's SRI market is climate change. Another one is the use of ‘norms', such as the UN's Global Compact Initiative and International Labour Organisation (ILO) standards, as a way of assessing company behaviour by investors. "Since the crisis we have also witnessed specific interest in corporate governance, such as the checks and balances within companies, remuneration committees at the board level and power separation between chairman and CEO," says Christensen.

Christensen adds that asset owners still need to work on the inclusion of SRI factors in their mandates in order for asset managers to implement SRI strategies, although the number of investors doing this has increased in recent years.

The main risk to the development of SRI, says Christensen, is dilution. "Institutional investors or asset managers may cherry-pick two SRI themes - for example, climate change in anticipation of legislative changes or because they have found a way to quantify it - which they are most interested in and which will form part of the integration approach," says Christensen. "At the same time they ignore other human rights or supply chain issues which they perceive to be less important or harder to incorporate into their financial models. Therefore, there is a risk of dilution in the trend of growth, of the market just becoming a few SRI issues among the more mainstream players."

Another barrier remains the definition of SRI. Christensen is confident that the SRI market will become clearer and more developed so that different market participants can identify their own type of SRI behaviour.

Measuring the financial performance of SRI is still an issue. "The next step is further developing impact-investing practices in SRI," says Christensen. "The up-and-coming question is how to measure the environmental or social impact of an investment approach on an ex-post basis."