Industry must start to overcome hurdles

This article is part of
Sustainable Investing - October 2015

Mention of the term sustainable investing has previously brought to mind the concept of negative screening, suggesting lower returns for investors.

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.

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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.