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Slow dawning of enlightenment

The socially responsible investment (SRI) market in Europe was given a significant boost in the latter half of 2002. The Netherlands-based European Sustainable and Responsible Investment Forum (Eurosif), the non-profit organisation designed to promote the concept and development of SRI across Europe, received funding from the European Commission to help it remove obstacles to further SRI development and compile an effective and comprehensive map of the European institutional SRI market.
However, despite numerous conferences and forums at supranational level, most individual member countries complain of slow, albeit positive, development of their individual SRI market, particularly vis-à-vis the institutional side.
“The main development in France is the creation of a special trades union committee designed to influence the way companies and investment managers invest their Epargne Salariale assets, the long-term company savings plans,” says Robin Edme, founder and managing director of Paris-based SRI and corporate social responsibility (CSR) consultancy Maqassar.
Edme explains that setting up the new committee resulted from the Epargne Salariale law of February 2001, which sought to overhaul the French company savings and retirement market. He says the committee looks at ways in which investment managers take into account ethical, environmental and human rights issues when choosing companies to invest in. “The committee came up with six stringent criteria which are legally binding. This is a very encouraging step for SRI in France, even though the number of dedicated SRI funds remains low.”
Edme believes the number of SRI funds can only increase thanks to the committee. “Getting the unions involved like this is perfect to kick-start the French SRI market, given the influence and power they still wield in France. We have already seen major players such as BNP Paribas set up new SRI funds,” he adds.
Other legislation in France includes laws leading to greater reporting transparency, which Edme believes will help the SRI market, and the new €31bn national pension reserve fund law which states that environmental, social, ethical and human rights records must be considered before any investments are made. “The accounting law only refers to listed companies, however, but it is a step in the right direction,” says Edme.
Nonetheless, development of the SRI market in France is slow, with Edme estimating it will be another 10–15 years before the new accounting laws are extended to cover unlisted companies and only 1% of mutual funds in France have an SRI bias, compared to 12% in the US.
“But these figures are somewhat misleading,” Edme claims. “When you adjust the US figure for investments in tobacco companies, which are not taken into account, the number of SRI funds shrinks dramatically to 1%, so France and the US are actually on a par. Nonetheless, we have some way to go before SRI here is as developed and sophisticated as in the US, UK, Netherlands and Nordic countries, but we are moving in the right direction,” he adds.
In Germany, there was a decline in volume of SRI investments last year, despite a growing number of SRI-dedicated funds. “There was no real movement in the SRI market in Germany last year. The declines in volume reflect the general depressed state of the financial markets,” says Walter Kahlenbom, director of Berlin-based Adelphi Research, a non-profit research company specialising in sustainable and ethical investment strategies. “Though it may seem puzzling that the number of SRI funds increased whilst the investment volumes declined, you have to remember that not all the funds are actually German registered or owned.”
Nonetheless, Kahlenbom believes the underlying development of SRI in Germany is moving fast as investor interest in the area grows. “I’m very happy with the pace of SRI and CSR development at the moment. Major investment houses are launching specific SRI products and shareholders as well as investors are increasingly expecting managers to consider the ethical and environmental record of the companies they invest in. This is very encouraging. The market may be stagnant at the moment, but this is largely due to the economic situation in general. The right measures are being taken to ensure SRI takes off in the future,” he says.
The institutional market in particular is adopting a very proactive stance on SRI and CSR issues, Kahlenbom believes. He says it’s not only the new Anglo-Saxon style pension funds that are including SRI policies in their investment strategies but the other capitalised pension vehicles introduced by the recent occupational pensions reform in Germany. “Of the five new types of occupational pension vehicles that companies now have to offer, only the pension funds (Pensionsfonds) are bound by law to look at ethical, corporate governance, human rights and environmental issues before investing. But what we are seeing is companies proactively adopting similar strategies for the new-style Pensionskassen and insurance funds, too. In fact, the institutional market is currently outpacing the retail market quite considerably in the use of SRI strategies,” he explains.
But it’s not such a rosy picture in Austria and Switzerland, the other major German-speaking markets in Europe. Kahlenbom says the main development there concerns the proposals for increased disclosure and transparency among pension funds in their reporting and accounts. “All three major German-speaking markets were involved. However, what started out optimistically soon turned sour, as the Austrian authorities rejected the proposals altogether and the Swiss only adopted them where voting rights were concerned. The law was implemented in Germany, which is naturally welcomed, but we were confident of a wider European coverage for the law.”
But the private market isn’t bound by the same law and, according to Eurosif, private pension providers in Germany are simply declaring their intentions not to use ethical, ecological or social criteria rather than subjecting themselves to stringent reporting obligations.
Adelphi is preparing a special report on the impact of the disclosure law on the German institutional market, though monitoring the SRI market remains difficult without further legislation. “It’s difficult to define what is and what isn’t socially responsible. We need to get some proper and formal guidelines in place so we can keep track of the market,” says Kahenbom.
Across the border in the Netherlands, the successful lobbying by the pro-SRI community against government proposals to end the tax-exempt status of ‘green’ investments is unlikely to halt a slide in SRI-type investments there. “The damage is done, even if there is no formal change to the status quo,” says Piet Sprengers, director of the Culemborg-based VDBO, the Dutch association of investors for sustainable development. “It’ll take some time for investors to rebuild their confidence in green investments, since they feel the government can do what it wants and may try to pass this law again in the near future.”
Sprengers says the institutional market has seen an upswing in investor interest in SRI-related funds and as such new products are being developed. “ABP has just launched, Loyalis, a SRI-specific product, in which several major Dutch pension funds have expressed an interest, though I can’t say which at this time. Furthermore, Robeco has already switched from one major index to another to benchmark its investments because the original one included tobacco companies. So the institutional market is developing quite nicely, it would seem.”
Another major development in the Netherlands was the adoption of a disclosure law for pension funds, similar to that in Germany. “This is an important initiative in the monitoring of SRI-type investments since it will lead to greater transparency in pension funds’ reporting and accounts,” says Sprengers, who adds that although the law was introduced last year, its initial impact won’t be seen until companies issue their half-yearly reports later this year. “It will be interesting to see what difference the new law will make. We believe it has already been instrumental in Robeco’s decision to switch indices,” he says.
Sprengers believes the overall development in the Netherlands of the SRI market remains slow, as elsewhere, but it is moving in the right direction. “The impression we get is that people are still talking about SRI but statistically it is still a small market in the Netherlands, though big compared to that of other major European countries. We do expect to see some overall growth for 2002 which will certainly continue throughout this year.”
In Italy, the legislative framework remains unfavourable, according to Eurosif, and there are no proposals to introduce any new legislation in the near future. Nonetheless interest in SRI and CSR issues continues to grow there. Eurosif says the debate on the EC’s green paper on CSR has been very lively in Italy and the government there has noted the increased interest among company shareholders as well as within the financial community. The debate in Italy concerns mainly the institutional sector, such as pension fund investment strategies, and shareholder activism,
Andrea Di Turi, a spokesman for Milan-based research company, Eticare, says it’s time the government took more action. “A recent survey carried out within the Italian investment community revealed that 45% of Italians favoured some form of SRI in the investment of their long-term assets. We feel the time is right to introduce legislation to enforce SRI strategies, particularly in the institutional market, such as pension funds, and to give greater transparency in company reporting,” he says.
In the UK, a report last year by London-based Just Pensions, a special research organisation created to investigate and monitor SRI among UK pension funds, found that the UK’s pension funds were still not implementing the SRI policies they claimed to have developed, despite having changed their investment strategies in line with special SRI amendments to the 1995 Pensions Act in 2000. This requires pension funds to disclose the extent to which they consider social, environmental and ethical conditions in the companies they invest in.
Duncan Green, director at Just Pensions, believes the way forward may be government intervention, as only a handful of funds have so far actually implemented their SRI policies. “Unless more pension funds take urgent steps to improve the implementation of SRI strategies, the case for regulatory action by the government will be strengthened,” he says.
According to Eurosif, almost two thirds of the UK’s largest pension funds, worth collectively €351bn, have some form of SRI policy incorporated into their investment strategy and this is expected to rise. “It hasn’t been easy for smaller funds to adapt to the new SRI investment principles. Moreover, it has been extremely difficult to monitor without formal guidelines in place. Deciding what is and what isn’t social, ethical or environmentally-friendly is a complex business in itself. Nonetheless, the UK market is moving forward and is in a strong position compared to other European countries in this area,” says a spokesperson for the UK Social Investment Forum (UKSif) in London.
UKSif claims the asset management industry in the UK is also moving in the right direction. “Many investment institutions have either expanded their in-house SRI teams or hired their first analysts working exclusively on SRI issues,” says the spokesperson.
Elsewhere, Eurosif believes one of the main trends to watch out for in the UK is changing company behaviour and shareholder awareness of SRI and CSR issues. It says many companies are now looking more closely at CSR issues, and corporate giants such as Shell, BP Amoco and Balfour Beatty have all now incorporated CSR resolutions into their company constitutions.
Eurosif says the growing number of ‘social indices’ is something else to look out for. The FTSE4Good family and the Dow Jones Sustainability index group are already up and running and likely to influence the development of similar indices elsewhere in Europe.
Belgium is the only other country where there has been major development of SRI. As with Germany and the Netherlands, and in line with existing legislation in the UK and Sweden, the Belgian government introduced new pension fund legislation last year, the so-called Vandebroucke law, which will challenge pension funds to report the degree to which their investments take into account social, ethical and environmental considerations.
Elsewhere, the regional government of Flanders recently decided that its new €400m Flemish Care Fund would adopt a sustainability and SRI strategy.

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