A new report suggests growth in responsible investments is unstoppable despite the credit crunch. Nina Röhrbein reports
Responsible investing (RI) will significantly reshape the asset management landscape in the near future and become mainstream within asset management over the next few years, according to a report by Robeco and consulting firm Booz & Company entitled ‘Responsible Investing: A Paradigm Shift'.
Among the factors the report lists as driving the growth of the RI market are increased social awareness and media attention, technological innovation, changes in legislation relating to RI, an established track record for RI performance and rising energy prices and economic pressure.
The study, which was written before the financial crisis struck, sets 2015 as the year by which RI will become mainstream - defined as 15-20% of global assets under management or $26.5trn (€20.6trn). But Robeco corporate development manager Robert Oskam says he suspects this could now be brought forward by a number of years.
"I believe that the process will be speeded up as a result of the credit crunch and the crisis in financial markets because people are now much more aware of the meaning of responsible management and investing," Oskam says. "There will be a lot more focus on the integration of environmental, social and governance [ESG] factors in businesses and industries and on engagement services in the years to come."
He continues: "Mainstream can also be defined as something that has become an asset class on its own or a separate part of a portfolio. And that is what you already see happening, particularly with institutions. Pension funds in the Netherlands, for example, already have a part of their portfolio focusing on RI and are often obliged to report on it.
"In general, RI has already been taken up by various institutions across Europe although RI strategies differ between countries and regions. In Europe, for example, investors mostly make use of engagement overlay services and positive screening. But in the US, partly due to its laws and regulations, RI is much more focused on exclusions, in other words on negative screening. But we believe there will be convergence in terms of the RI strategies that will be used in the future, which will lead to more engagement and integration of ESG factors into the investment processes and decisions, resulting in enhanced performance."
Europe is set to drive much of the report's projected 25% per annum growth in RI over the next few years - particularly the UK and Switzerland. "These are already important countries with regards to responsible investment and asset management in general," explains Oskam. "And for the study we focused on countries that already have a lot of assets under management."
Institutional investors currently form the majority of responsible investors but retail investors are catching up quickly although, according to the report, their share of the market will remain below that of their institutional counterparts.
RI revenue is projected to be around $53bn in 2015, with RI products forecast to become a major source of revenue for asset managers compared with RI mandates, which are currently the dominant product, representing more than 90% of total RI assets under management and around 66% of the total RI revenue.
Today's RI market is very fragmented, as larger players have not yet actively pursued RI or are only just beginning to position themselves in the market, says the study.
"Right now it is mostly niche players that are at the forefront of RI, such as Sustainable Asset Management (SAM) or Swiss private bank Sarasin," says Oskam. "But others have also started to look at these developments and are considering how to integrate them and how to position themselves in order not to fall behind their peers ."
The report predicts that by 2015 niche players are likely either to be taken over by global players or to have grown to become sizeable specialists themselves.
"It is a relatively normal cycle," says Oskam. "Innovation always starts with entrepreneurship and smaller boutiques. But as they grow they need economies of scale."
And Oskam does not believe that anything will stop that growth. "Of course, investments are currently much lower and people are even withdrawing money," he says. "There could be a delay to investments in RI as a result of the credit crisis but if you look at the percentages of responsible investing as part of total assets under management, we do not see any reasons why that would decline."