Investors turn to SRI to restore financial discipline

A few years ago, socially responsible investing was relatively unknown. Now European asset managers are increasingly incorporating ethics in their investment techniques. Luisa Porritt asks whether it will last.

Socially responsible investing (SRI) has in the past been met with some cynicism, with investors unclear about its potential to generate returns on the scale delivered by traditional investing. But the debate has moved on.

Increasingly, global corporates are adhering to environmental and social governance guidelines, and that search for discipline has spilled over into financial investment techniques. Investors are still demanding returns first and foremost, but those returns are being generated from pre-defined ethical guidelines.

A rapid growth in SRI funds over the past few years is evidence of that trend. Today, the European SRI market holds about €5trn in AUM, up 87% from two years ago when it was €2.7trn, according to European pension fund body Eurosif’s 2010 survey.

Total ‘core’ SRI assets, or those meeting more stringent SRI demands, represent 10% of the entire European asset management industry. So what has driven the sudden surge towards SRI, and is it sustainable? A change in consciousness since the financial crisis is often cited as a turning point.

“The financial crisis has elevated the question of ethics in the boardroom,” says Camille Thommes, director-general at the Association of the Luxembourg Funds Industry. Jacques Santer, former Luxembourg prime minister and chair of the European Commission, describes the financial crisis as “a crisis of ethics for the financial sector”. He adds: “The financial crisis showed that a new approach was needed to short-term and longer-term sustainable development.”

Unsustainable

‘Irresponsible events’ such as the financial crisis and the BP Deepwater Horizon oil spill have put principles of responsibility more on people’s radar, claims Sandra Carlisle of F&C Asset Management’s governance and sustainable investment team.

Andreas Utermann, chief investment officer of RCM, a unit of Allianz Global Investors, agrees with her: “Financial analysis and the traditional way analysts examined companies and ran their programmes were just not sustainable. It became clear that both regulation governing the industry, and how BP was run, were not sustainable in the long run.”

 

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