There is no doubt that assets attributed to “SRI” or “ESG” are growing across Europe.
Data from Luxembourg, the jurisdiction with some €3.46trn in domiciled assets, estimated in its European Responsible Investing Survey 2015 – which covered data to the end of 2014 – that the CAGR of RI assets grew Europewide by 9% between 2010-2012; between 2012-2014 the rate was 25%, to a total of €372bn. Luxembourg accounts for some 35% of RI assets as they then stood across the region.
Demographic changes are cited as one reason for this growth. A recent BNY Mellon report – Generation Lost: engaging millennials with retirement savings – said: “Social Finance has a very strong appeal to Millennials, yet they do not feel that adequate impact oriented investment options are accessible. By engaging with Social Finance products and promoting existing SRI options, financial services providers can connect with Millennials and potentially help the Social Finance market achieve critical mass.”
More recently, Efama, the European Fund and Asset Management Association, noted that responsible investing is increasingly being defined by policy demands at the EU level.
The Efama Responsible Investment Report published in September 2016 may have ruffled a few feathers with its assertion that “there is no statistically relevant outperformance or underperformance of Responsible Investment strategies.”
However, as Peter De Proft, director general of Efama, noted: “There is no doubt that demand for sustainable and responsible investment is growing. This is in part due to the recognition that economic sustainability will impact longer term value creation, however the changing social and ethical values of asset owners and the broader public have also strongly influenced this transition”.
So, the landscape is one of increasing commitment to SRI. But, what is not yet clear is the degree to which different investors agree on common definitions of SRI, or what that would mean in terms of committed assets – particularly for, say, long term investors driven by liabilities that may be half a century out.
CHALLENGE OF DEFINITIONS
“The term ‘Responsible Investment’ or ‘RI’ is preferred by Efama Members over the more commonly used SRI because RI indicates that the responsibility of investment managers goes beyond being socially responsible to encompass environmental responsibility as well as governance,” the association states on its website.
“It is Efama’ s view that RI cannot be captured by a single regime, but a variety of approaches need to be allowed for.”
The approach is emphasised in Efama’s recent report, in which it “recommends the development of procedural standards by the industry for investment managers at European level, which would enable investors to evaluate different approaches to responsible investment and allow for informed choice in the marketplace. Efama believes standard setting should focus on processes rather than outcomes, given the complexity in defining socially responsible behaviour of companies beyond applicable legislation.
“Self-regulatory initiatives on transparency standards for responsible investment should also be supported. This would enable investors to evaluate different approaches to responsible investment and allow for informed choice in the market place.”
Philippe Zaouati, CEO of Mirova, an affiliate of Natixis Global Asset Management, comments that although “2015- 2016 are turning years for green finance … SRI is a concept established by technicians that nobody really understands”.
“There has never been a consensus between issuers around SRI and public authorities that have never known how to position themselves on the topic.”
That said, he also is encouraged that “public institutions and private actors across the world are finding a consensus around green bonds” as an area of growth.
“France will be the first country to issue sovereign green bonds next year in order to fund environmental projects. Banks are already involved in green finance as 60% of the infrastructure projects they invest in are labelled green. But green bonds’ issuances do not develop as fast as it should be on the corporate side.”
“We stress two types of companies. On the one hand, firms have lots of green assets and they assess the additional cost, even though marginal for them, of issuing a green
bond is not worth it.
“On the other hand, issuers have few green assets. Large industrial firms enter into that scope as they struggle to cope with energy efficiency. For some, a reputational brake exists. If oil companies issue green bonds, it might be seen as greenwashing.
“Green bonds’ rates remain similar to that of traditional bonds. They behave better as green bonds generally appreciate quickly right after their emission.
“There must be advantages to issue green bonds, some sort of incentives in regulation and fiscally. If you exclude green bonds from the scope of the financial transaction tax, the amount of issuers interested will clearly increase.”
There are, of course, attempts to create standards to enable investors to compare one type of responsible investment – whether it is called SRI or ESG – with another. The Luxembourg Finance Labelling Agency (LuxFLAG) recently added to its Microfinance, Environment and ESG labels by adding the LuxFLAG Climate Finance Label, which is intended for investment funds meeting specific criteria relating to climate criteria.
The label can be applied to Ucits and AIFMD funds domiciled throughout Europe but crucially also in “equivalent jurisdictions”. The first funds to receive the label as of December 2016 are the East Capital China Environmental, Green for Growth Fund Southeast Europe and NSF Climate Change + Fund.
As Zaouati at Mirova notes: “A label is part of an ecosystem. It generates confidence. Organic labels have gained public recognition.
“You buy organically-labelled produce because you want to support organic agriculture even though you do not necessarily know what is specifically signified by the label. The launch of the TEEC and SRI labels by French authorities aims to bring confidence to investors regarding SRI but that shall be accompanied by some financial support and fiscal
“The means that have been provided so far to promote the labels are not enough. Without a label that is not publicly recognised, it seems impossible to raise awareness of clients towards responsible investments. Our funds have been awarded the French public SRI label.”
The increasing commitment to responsible investments is not only going to rely on labelling. It will also rely on relevant investment parameters being extended to areas that may currently seem further away.
Emerging markets assets, for example, are often seen as needing to offer a significant premium to investors to encourage them to take on risks that are not quantifiable as standard deviations, such as the reputational risk of dealing with less democratic regimes.
However, emerging and frontier markets specialist East Capital recently outlined reasons why it sees opportunity to engage in sustainable investments in China. Louise Hedberg, head of Corporate Governance, told the Nordic Investment Managers Forum in Luxembourg that: “It is very clear that China has understood the importance of swiftly addressing and improving the very bad environmental situation in China.
“They have taken clear leadership in getting the Paris climate agreement in place and ratified ahead of schedule and are pioneering the green finance space.
“The 13th five year plan for 2016-2020, which is the central government blueprint for China’s long-term social and economic policies, makes the war against pollution a priority.
“This implies strong policy support and a doubling of investments into environmental protection, amounting to almost 3% of China’s GDP in 2020. It will also mean stricter implementation of regulations for the non-environmentally friendly companies, which will require companies to swiftly adopt better environmental practices.”