It’s difficult enough to know what to call it today – SRI, CSR or sustainable investment. But what is certain is that the area of what might be termed ‘responsible investment’ has both come a long way, yet finds itself at something of a crossroads today.
Just how far SRI has moved into mainstream investment consciousness can be gauged from a recent quote by Avinish Persaud, managing director and global head of research at State Street, who noted: “The world’s largest pools of capital are owned by investors who look favourably upon SRI. SRI has grown rapidly and will continue to do so.”
Persaud was not wrong. Just listen to Phillip Angelides, Californian state treasurer and a member of the investment committee at CalPers, the biggest pensions fund in the US: “There is a correlation between good practices and good investment results. People in the investment industry often want to put up a wall between the two things, but they are related.”
The question today though is just how far the pensions industry has made the transition from a ‘values’ based to a ‘value’ driven approach to responsible investing – and whether such an approach actually exists.
At a recent conference in Stockholm, the European Socially Responsible Investing Congress, experts attempted to answer some of the big questions.
Matt Christensen, executive director at Eurosif, the European Social Investment Forum, noted that the shift from retail to institutional investment had meant that SRI investment was under the microscope with media attention focused on whether the area should be regulated or self-regulating.
He quickly hit the nub of the quandary for institutional investors today, raising the issue of the “business case” for SRI in a world where the “NGOs (non-governmental organisations) are now in suits and attending these types of events”.
Christensen noted: “The discussion is between the social and the value-added case for institutional investors.” Regarding this, he posited his belief that the mainstreaming of the business case for SRI had increasingly raised the prospect of “the NGOs and the suits working together”.
Nonetheless, Christensen remarked that responsible investing had yet to become a homogeneous field for pension funds in Europe, pointing out for example that in the UK the emphasis lay on disclosure but not regulation and that the growing trend was for pension fund engagement.
The more consensus driven approach in the Netherlands, he noted, led to self-regulation and growing attention from pension funds.
In Germany, however, the movement had been driven by the green lobby, which he remarked had led to the introduction of some reporting requirements and the dominance of investment screening.
French institutions, he said, favoured social issues and funds needed to have a “réglement” in this area, while trade union involvement had proved a major driver of SRI in the market.
Finally, he cited Sweden where the SRI debate had split on a state versus private sector basis, with the onus on quasi-government entities to take social, ethical and environmental issues into account.
With this disparity in mind, Christensen highlighted the potential involvement of the European Commission in the area of responsible investment, although he conceded that this was very much at discussion stage.
“It’s difficult to know where this will end up, because it is still difficult to talk about responsibility and the business case for it – but it seems likely that the EC will make moves into this area. “There is already much discussion on CSR within the pan-European pensions directive, but there is still more need for transparency, etc.”
To this end, he highlighted a Eurosif initiative to pilot the introduction of transparency guidelines for SRI funds in the retail sector, which he said could herald similar initiatives for the institutional sector in the future.
Christensen also said the organisation would be publishing a report in the autumn to assess the size of the global institutional SRI market - something which has been difficult to gauge to date.
Gary Topp, associate director of SRI at Henderson Global Investors in London, told the conference that one problem in trying to gauge the size of the global institutional market was the blurred definition of what SRI is.
“There are quite a few mainstream pension funds in the UK, for example, that wouldn’t consider themselves to be SRI managers but would certainly expect their fund managers to be involved in governance and so on.
“If you include the situations where pension funds are telling their fund managers to vote against a particular pay scheme or to invest in companies that are in line with the Universal Declaration of Human Rights then I suspect that the size of the CSR market could be enormous.”
Consequently, he questioned whether there might not be a need for asset managers to work together on issues such as corporate governance, pointing to the Netherlands where there is already an association of corporate governance to do just that.
Topp also highlighted moves by the French national Fonds de Reserve, which stated recently that it would be putting around 16% of its assets into SRI investments, as one of the clearest indications yet that SRI was now a serious proposition in Europe.
“On top of that Spain has also just passed legislation to ensure that all pension funds will publish their SRI commitments.”
Going forward, Topp also pointed up work to be done on establishing SRI criteria within asset classes such as bonds and property – noting that research and methodology were areas where transparency would be required in the future.
The conference also heard about the proliferation of SRI-based products coming into the market – particularly exchange traded funds (ETFs).
On top of that, asset managers have begun to set out their stalls in terms of SRI. Neil Dunn, chief executive officer of small cap specialist, Kempen Capital Management (UK), claimed that small cap managers could be considered as de facto governance specialists due to their close relationship with small firms in which they often had major stakes and direct contact with the board.
More significantly, Terry Raby, internal auditor at the UK Universities Superannuation Scheme (USS) gave an inkling as to where pension funds were actually headed in terms of choosing managers with firm commitments to responsible governance principles.
Part of the USS investment process, he explained, was manager assessment: “We feel that assessing any manager on their responsible credentials is equally as important as picking stocks. “For USS it is a question of credibility towards our pension fund stakeholders to say what we believe good practice is and measure what our managers do.”
Raby says the fund begins with a working model of what it wants managers to do, then spends at least a day with each manager talking with the CIO, analysts and governance and responsibility specialists. The fund then reviews the findings, revises its approach where necessary and reports back to managers.
“Numerical scores are attached to each manager along with the reasons for this because the objective is to discuss and improve the position with the manager.”
The other huge debate, of course, with SRI is whether it performs.
Wim Vermeir, global head of equity and sustainable development at Dexia Asset Management in Belgium, explained that there was still no hard evidence that sustainable evidence would be better than traditional investment over the long term.
“There are some good indications that it might, but this is up for debate because there are no hard figures.
“It’s also difficult to establish whether in a sustainable portfolio the performance is coming from the sustainable aspect or from other biases such as sector/country/style differences and factors.”
In turn, Will Oulton, deputy chief executive at FTSE asked whether SRI would actually become a mainstream investment style. “One issue that I think may be hampering development is that investors are still struggling with the issue of the measurement of financial risk and there is a need for development of analysis here.”
Oulton also warned that governments and regulators were becoming keen on applying so-called “best practice standards” where they perceive that voluntary interests are not working – citing the recent moves on executive remuneration and governance in the UK – and arguing that such intervention could become “a race to the bottom” if investors were not careful.
Finally it was left to Matt Kiernan, executive director at Innovest Strategic Value Advisors to answer the question that if CSR investing made sense then why was its market share just 1% and not 80%?
“My own personal theory is that we are working in the most conservative and change resistant industry in the world. There is a hypocrisy co-efficient gap between the rhetoric and the reality of what pension funds do. Kiernan argued that the onus of investment proof was much higher for the CSR industry than elsewhere.
“We are held to standards that others couldn’t begin to meet.
“For example, in the US a number of pension funds have told me they will do nothing in this area even when they can, due to what they see as a lack of industry agreed standards.
“I’ve had people rigorously debate the quality of sustainability analysis and then you say to them, well, does it keep you up at night to know that if you change one accounting assumption that the combined profits of the Nasdaq companies last year go from plus $80bn (E70bn) to -$20bn, that doesn’t seem to bother anyone, whereas they will quibble with a supply chain management issue in Malaysia!”