Going for engagement
By the end of the first quarter of next year ABN Amro will have rolled out its SRI offering to France, Germany, the UK and the Netherlands.
The offering is based on the approach adopted by the bank’s Swedish subsidiary Banco Fonder, the main centre of ABN Amro’s SRI activity and which has been pursuing a policy of active engagement since 2000. It first became involved in the SRI arena back in 1990 with the launch of a charity fund.
ABN Amro expects strong growth in the sustainable investment market and forecasts that sustainable assets under management will increase from E93bn in 2004 to E173bn in 2008. These figures are the result of a Mercer Oliver Wyman study commissioned by ABN Amro last year to look into the opportunities in the SRI market. “Retail is just a small part of this figure,” says Tonika Hirdman, managing director of Banco Fonder and ABN Amro’s global head of SRI.
But with so many SRI offerings in Europe where are the main opportunities within the potential E173bn? Hirdman believes that the current market offering is not as extensive as one might think: “On the continent active engagement is not very widespread; some firms do it but it is ad hoc and not very systematic. Most continental European SRI funds have little focus; they seldom have a broad range of sustainable investment classes and a comprehensive SRI offering. They offer SRI because feel they need to have an SRI offering. The market is full of product providers.”
ABN Amro aims to plug this gap by pursuing what it terms its product range strategy. “This is aimed at allowing customers to build a whole portfolio based on SRI – including fixed income, emerging markets and other alpha generating assets,” says Hirdman.
A corporate bond portfolio will be part of this offering. “The same SRI issues and opportunities come into that as in an equities investment,” she continues.
Higher risk asset classes will also be offered. “Emerging markets are very interesting because of the opportunity for a higher return which they offer,” Hirdman points out. “But they also represent a large risk from an SRI standpoint.”
The idea for an emerging markets element to the SRI portfolio derives from ABN Amro’s longstanding presence in Brazil through its subsidiary Banco Real, where it launched the first sustainable fund in an emerging market back in 2001. “We hope to develop our emerging markets offering based on our experience in Brazil.
“The Brazilian fund has consistently outperformed the mainstream since the fund was launched in 2001,” Hirdman points out, “a sign that SRI can improve performance.”
A number of studies have been carried out into whether there is any material difference between the performance of SRI funds and non-SRI funds. “Most studies conclude that there is no difference in performance in the long term,” Hirdman concedes. But many people just consider the short term in reaching their findings.”
ABN Amro’s approach does not use blacklists. “Our approach is based on sector-based engagement,” says Hirdman. “We identify the risks and opportunities in a given sector and see which companies operate best in these environments. We then look at the companies that do less well and use engagement to help them improve. We need to be open to the possibility for selling off if engagement doesn’t work.”
The approach to SRI also incorporates partnerships with NGOs such as Save the Children and The International Red Cross. “We add to our SRI expertise through a mutual exchange of ideas with such organisations,” says Hirdman.
Banco Fonder also operates knowledge transfer workshops where it invites a small number of companies in different sectors to discuss a variety of issues that affect SRI. “We solve the issues in the group,” says Hirdman. “Currently, for example, the bank is looking at the M&A process and the sustainable issues there.”
The significance of the M&A issue is partly the fact that activity is on the increase again. As Hirdman notes, there is now so much of it that issues such as corruption and environmental issues are not being addressed. “By not addressing these issues in the M&A process you acquire the risk from other companies,” she says. “Social issues, ethics and human rights need to be incorporated into the due diligence work.”
She adds: “In telecoms, corruption has been very difficult to eradicate. We want to work with companies in the sector to encourage them to take measures to deal with it.”
Of the countries intended for the European roll-out Hirdman points to the Netherlands as offering the greatest opportunity. She sees the UK as the most challenging market on account of the fact that there is already some competition in the marketplace in the form of Hermes and F&C which like ABN Amro practice active engagement.