Industry must start to overcome hurdles

Now, however, terminology such as ESG (environmental, social and corporate governance), impact investing and sustainable investing have become more familiar concepts. But has there been any real progress in adopting these principles and values in practice?

At the Principles for Responsible Investment (PRI) conference in September, much was made of the impact so-called ‘millennials’ are having.

Speaking at the PRI in Person event, which was held for the first time in London, Pimco chief executive Douglas Hodge said: “Millennials are almost twice as likely to consider sustainability than the baby-boom generation.”

PRI managing director Fiona Reynolds points out in a video interview with Investment Adviser that “responsible investment is actually not that old”, while PRI itself has only been operating for nine years.

The organisation counts some of the largest managers in the UK among its signatories, including Aviva Investors, BMO Global Asset Management and Henderson Global Investors. Signatories are required to report annually to the PRI on their responsible investment activities.

Data from the Investment Association (IA) shows funds under management in what it defines as ethical funds have steadily increased in the past nine years.

A spokesperson explains: “Ethical funds have steadfast appeal to people who are looking to be able to invest with a range of socially responsible criteria in mind. Since the end of 2009, assets under management in ethical funds have grown by 71 per cent – from £5.8bn to £9.9bn – suggesting interest in this type of investing is here to stay.”

In spite of inflows into ethical funds, they remain just 1.2 per cent of the industry’s total funds under management.

Anecdotal evidence from the IA’s annual Asset Management Survey shows an increase in the number of requests for ethical funds from younger investors in the context of pensions auto-enrolment.

But perhaps one of the hurdles to significant take-up of responsible investing among UK asset owners has been its definition. Quilter Cheviot executive director of sustainable investing Claudia Quiroz says the term “means different things to different investors”.

She notes: “Sustainable investment means identifying companies that are going to provide a cleaner and more efficient economy. There are so many definitions – so negative screening is all about investors saying, ‘these are the things we don’t want to invest in’.”

This type of investing has largely shaken off the notion that investing with ESG issues in mind, or in a way that considers the impact on the environment, leads to lower returns on investment. There is also less emphasis on excluding companies from a portfolio for negative reasons, and more of a focus on the positive impact that the right equities held in a portfolio can have on the environment.

Bozena Jankowska, global co-head of ESG at Allianz Global Investors, notes that while sustainable investing is becoming more mainstream, there remain challenges. “While it has come a long way in the last 10 years, ESG disclosure continues to remain patchy,” she says.

“We now have more concrete data on carbon from CDP [Carbon Disclosure Project] and companies have become more sophisticated with ESG disclosure, but there is still much more to do here. I would argue that the mainstreaming of ESG is a work in progress. While we still have a few hurdles to jump over, we are heading in the right direction.”

On a global scale, the UK appears to be well ahead of many other countries in adopting sustainable investing. Eurosif’s European SRI Study 2014 calls the UK “Europe’s largest sustainable and responsible investment market”.

Ms Jankowska proffers: “France is currently stealing a lead in Europe as one of the more progressive countries, along with the Netherlands, but both have slightly different approaches to ESG. Germany has been a laggard but is slowly starting to wake up.

“The UK has had a good track record in leading on corporate governance issues, while in the US the more niche responsible investment funds and asset owners take a more activist stance.”

If the responsible and sustainable investing industry is to grow, asset management needs to change its perception of this type of investing from being a hurdle, to a way of engaging with a younger generation of investors in the long term.

Ellie Duncan is deputy features editor at Investment Adviser

INVESTING DEFINITIONS

Impact investment

This encapsulates investments made into companies, organisations and funds with the intention to generate social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate depending on the circumstances.

Integration of ESG factors

The explicit inclusion by asset managers of ESG risks and opportunities into traditional financial analysis and investment decisions based on a systematic process and appropriate research sources.

Sustainability-themed investment

Investment in themes or assets linked to the development of sustainability. Thematic funds focus on specific or multiple issues related to ESG.

Source: European SRI Study 2014, Eurosif

EXPERT VIEW

How relevant is sustainable and responsible investing to the average UK retail investor?

Fiona Reynolds, managing director of Principles for Responsible Investment, says:

“I think it’s really relevant to everybody. A lot of retail investors would still be investing in things where they’re thinking long term; it’s not just a short-term investment for them. They are saving for the future, for their retirement, and therefore they need to think about the people investing the money for them, if they are thinking about long-term risks.

In today’s world I think it’s pretty difficult to say that something like climate change won’t have an effect on us all in the future. For example, if you’re heavily invested in energy stocks, we know we are going through a long-term energy revolution and are [these] stocks thinking about and making that transition from a high-carbon to a low-carbon economy?

I think that it’s really something all savers and people who are invested for the long term need to be thinking more about and asking questions about.”

For the full video interview with Fiona Reynolds, entitled ‘Making sure you have a low-carbon pension’, please visit www.ftadviser.com/video.