IEPlus: Deconstructing SRI and its potential in Germany
A new book by German academic and consultant Dr Joachim Bottcher has tried to establish to what extent socially responsible investing is relevant in Germany and what the impact on mainstream investment management would be if siginificant volumes of SRI assets were to shift there.
Böttcher (pictured), whose firm scouts SRI investments for institutional investors, mainly churches, foundations, and insurance companies, says his work aims to “demystify the concepts and methodologies of SRI”.
“We are living during an age where a minority within the financial sector has permission, fully compliant with legislation, to badly damage social welfare for the creation of personal wealth,” he said.
“Such a modus operandi may be called post-democratic. One may partially blame the system itself, as it is comprised of suppliers of financial services, and of customers who in turn provide these suppliers with a “licence to operate” when they buy such financial services.”
However, he argues there is a new paradigm ahead. “Some experts argue that SRI is an optional pathway to integrate more democracy in investment decisions, whether done by retail or professional institutional investors.”
The book gives an academic background on SRI’s historic roots, the definition dilemma, strategies, and research methodologies for both institutional and private investors. Böttcher identifies performance, business-case orientation, risk avoidance, and promotion of environmental, social, and corporate governance (ESG) as the motifs and drivers with the potential to boost the economic impact of SRI further. Obstacles to SRI include the current regulatory environment of this type of investment in Germany.
He identified five types of SRI investor. First, a “performance-type” investor wants access to and exploitation of intangibles in order to generate long-term shareholder value. For this investor, one barrier is that opponents view SRI as harmful to performance, compared to conventional investment methods.
Second, a risk-type of SRI investor assesses the whole value chain of an organisation, its supplier and co-operative network, and relationships to other stakeholders. Here the problem might be that opponents view SRI as increasing an portfolio risk by lowering diversification opportunities due to restricting the investment universe.
Third, business case-type SRI investors view current or future considerations of ESG criteria as dynamic and company- specific, and as future competencies of an organisation. Opponents might suggest especially the financial sector lacks comprehension and acceptance of the new asset class. Business case investors usually rank traditional formulated financial targets ahead of extra-financial criteria.
The pioneering type of SRI investor is a fourth category. They seek to invest in promising process, product, and service innovations with a dedicated focus on small and medium sized companies. Pioneers tend to be frustrated because the SME’s are too small to absorb any significant interest from institutional investors who tend to have substantial mandates.
Finally, SRI’s are still viewed by many as harmful to fiduciary liabilities and performance targets. In Germany the legal duties of institutional investors still implicitly emphasise the maximisation of financial returns. The internal governance body of most institutional investors per legal definition is often bound not to take ESG factors, considered as being too soft, into account.
Böttcher says this will remain the case until both the industry succeeds in providing ESG/CSR reporting norms, which turn soft facts into hard facts with defendable financial relevance, and/or federal authorities amend the law.
Nevertheless, Böttcher is convinced SRI could replace the current investment paradigm.
A public debate and increased assets within SRI mandates may result in a shift of investors’ mindsets away from a pure focus on economic profit.
“While arguably searching for better strategies and tactics, the major group of defenders of the conventional ways of investing are being attacked by a growing number of advocates of the new SRI system. This will lead – and largely depend on – the introduction of further applicable and even more precise ESG measurement tools,” he said.
“Once the financial sector has stated to accept the SRI business case, advocates it, and finally acts in its sense, ESG-driven investment methodologies could become the preferred way of how we invest our money – and gain even more economic relevance.”
SRI – a Win-win Path for Germany? is published by Tectum
English, 358 pages, hardcover, €44,90 / CHF49,50