ESG roundup: Fitch on SRI performance, investment advisers' 'edge'
GLOBAL - Socially responsible investment (SRI) is no protection against poor or average investment processes, Fitch Ratings has warned.
Highlighting that SRI in itself has not improved the average risk/return profile of a European equity fund in the recent past, the ratings agency says investors should not neglect, as for any equity fund, the quality of SRI investment processes - notably reactivity, focus on strategic stock research and active risk management.
While exhibiting similar total expense ratios, SRI funds have, on average, underperformed non-SRI funds by 0.6% annually over the past three years in the European and euro-zone equity Lipper categories.
Market participants often view SRI as a lower risk and more defensive stock picking strategy.
This has not been confirmed in the past three years, says Fitch, as SRI funds have exhibited slightly higher volatility and drawdown - 19.5% and -23.2%, respectively, versus 18.8% and -21.7% for non SRI-funds.
The ratings agency nevertheless acknowledges that investors that adopt SRI also consider non-performance related benefits, such as carbon footprint or the social impact of their investments.
Even on a longer-term basis, including 2008, downside protection is not statistically proven, says Fitch.
By contrast, European SRI bond funds have delivered better returns with lower risk in the past three years.
Excluding pure corporate funds, SRI filters have statistically added value in euro bond fund categories, with 0.2% annualised outperformance and lower volatility and drawdowns for SRI funds relative to non-SRI vehicles.
When applied to bond funds, SRI criteria reinforce fundamental biases and have resulted in greater deviation relative to debt-weighted indices, notably on peripheral sovereign and bank debt, Fitch said.
At the frontier with SRI, the agency sees growing investor interest in fundamental approaches to bond fund management and away from conventional debt-weighted indices.
SRI funds have been a popular segment in the past five years. Currently, 7.5% of the 1,900 European equity funds claim to follow an SRI approach.
SRI is newer in bond funds, representing only 5% of the 1,200 European bond fund universe.
According to Lipper data, SRI assets under management in Europe reached €121bn across 1,071 funds in April 2012, and were mostly distributed in France, Switzerland and the UK.
In other news, a report analysing the current state of the UK advice-giving market suggests that expert knowledge and commitment to sustainable and impact investment can give investment advisers the "competitive edge" they need to stand out in a crowded market.
The research - entitled 'The Power of Advice in the UK Sustainable and Impact Investment Market' - has found that while there are already some outstanding specialist advisers in the sustainable investment arena, the vast mainstream investment advisory community itself needs advice and convincing to play a more active role in the market.
The report cites lack of human resources, limited investable universe and policy and legal constraints as some of the reasons many advisers are staying away from the sector.
However, it also points out that those who decide to develop the required in-house expertise or build linkages with specialists will not only act as responsible corporate citizens but also bolster the resilience of their own business models, attracting more investors and deepening their relationships with existing clients.
Susannah Niklin, the report's author, said: "Advisers can play a catalytic role in creating more sustainable capital markets, and, despite the many challenges, our research shows there are now very powerful motivations for investment advisers to enter the sustainable and impact investment market.
"Those who have sufficient expertise to make recommendations in this space will be able to offer investors a valuable and hard-to-find service resulting in happier clients, potentially increased assets under management and the opportunity to contribute to sustainable social and environmental benefit at scale."