In a recent study, Eurosif came to the conclusion that the overall institutional SRI market reached E336bn in 2003. The biggest portion of these figures is to be found in the engagement practices of pension funds in the UK, as well as the widespread policy of negative screening within Dutch pension funds.
Witness also the multiplication of specialised players on the market: Rating agencies are flourishing across Europe, joint engagement initiatives are taking place in the UK and the Netherlands, and bank subsidiaries dedicated to the area have been created, for example, as Crédit Lyonnais did with IdeAM in France. The market is becoming more and more structured and the leaders of initiatives are now high street names.
The future prospects for this market can be gauged by looking at the current situation. While the retail side of the market is seeing new funds created regularly , with the number of SRI retail funds now over 400 across Europe, the real drivers will be found on the institutional side of the equation.
Three elements represent the key factors in influencing the shape of institutional SRI: disclosure requirements, the linkage of SRI and corporate governance and investor collaboration.
o Disclosure requirements: The legal framework around disclosure (both company and investment) in various countries is a key development factor, as more information on social and environmental issues becomes available. An illustration is the SRI Pensions Disclosure Regulation in the UK that came into force in July 2000. It requires occupational pension funds to disclose the extent to which they use social, ethical and environmental (SEE) criteria. In France, the Loi sur les Nouvelles Régulations Economiques requires French corporations to publish social and environmental information in their annual reports.
At EU level, the European Parliament is currently working through the Transparency Directive. This directive proposes to improve the information made available to all investors about publicly traded companies on regulated securities markets within the EU. It covers ongoing and regular reporting requirements of listed companies within the EU and in the context of some stock exchanges, such as London, it covers compliance with corporate governance codes as well.
Vis-à-vis SEE criteria, Eurosif submitted an amendment to the directive asking for companies to report on the non-financial risks that they face in their annual reports. This in turn will help the financial community to have better information for their investment decisions. The directive will be voted on by the European Parliament this spring. In any event, it can be expected over time that SEE criteria will be adopted gradually through various means at the EU level, whether they be voluntary or statutory.
Additionally, the EC is also promoting understanding and awareness of SEE criteria through the Multi Stakeholder Forum. This initiative is composed of regular, topical, roundtables of professionals addressing the various facets of sustainable development, CSR and SRI. This two-year process will be followed by recommendations, which will in turn affect future legislative efforts in the region.
Linkage of SRI and Corporate Governance: The second item driving the market is the realisation by some investors that taking into account social responsibility and corporate governance (CG) over the long term is a sound, sensible and profitable investment strategy. Linkage between these two disciplines is increasingly becoming a part of the investment landscape–both areas aim to bring company management in line with shareholder’s wishes. Pension funds such as the Universities Superannuation Scheme (UK) or ABP (Holland) find that it is effective to engage companies on these issues, whether they do it internally or through an outsourced partner.
This momentum is also to be seen, albeit from a less spectacular angle, through the arrival of asset managers, such as Allianz Dresdner AM, which now include SRI and CG criteria within their mainstream financial analysis.
o Investor collaboration: At the same time as the bridging between SRI and CG is occurring, investors are realising the power of collaboration is having an impact on focusing company performance for the longer term. For too long, investors have been passive in exercising their voting rights and demanding accountability by companies. The trend for institutional investors now is to engage the companies and in order to maximise their impact, to collaborate with others at the same time on critical issues. These examples include collaboration over issues such as climate change, as well as particular industries, such as the pharmaceutical sector. This will only grow over time, given the continued scandals on both sides of the Atlantic.
Nevertheless, this bright picture is stained by a few disturbing factors. First of all, enacting real change remains a tough challenge. Corporations and managers sometimes have their own agenda. Significant SEE or CG issues are sometimes hard to identify, and even when that is the case, committed investors do not necessarily have the leverage to bring about change on their own. Further structure and ad hoc collaboration is indeed badly needed. All the good will and regulations in place have not been able to prevent the downfall of Parmalat – nor to foresee it.
On another level, it must be said that EU-wide regulation remains a challenge – especially when it comes to pension issues. In practice, the EU has to cope with the different institutional cultures in Europe. Pension systems vary from one country to another, in the different mixes of capitalisation and repartition systems. In the first case, pension funds are in an easier position to enact SRI/CG because of their inherent strategy of long-term investment, which is largely absent from pay-as-you-go schemes. This gives a definite edge for SRI/CGI development to countries with a strong private pension funding system such as the UK or the Netherlands.
In addition, individual countries may have a different culture of financial risk. As SRI has evolved largely through the equity markets, it is dependent upon the volumes of equity investment within a given country in order to become tenable. As an illustration, asset allocation in pension funds ranged from 75% equities in the UK to just under 10% equities in Italy as recently as 2001. Thus, SRI will only become a mainstream trend for pension systems as a whole in established equity markets.
Last but not least, a consensual definition of fiduciary duty, the key factor deciding retirement funds’ investment policies, remains an obstacle for trustees in their ability to accept SEE criteria as a part of fund management.
In light of all this, Eurosif is committed to being proactive in supporting legislation favouring both the development of SRI/CGI market as well as initiatives enabling shareholders to assert their rights.
Matt Christensen is executive director and Jerome Tagger is head of research at EUROSIF, the European Sustainable and Reponsible Investment Forum