François Passant, executive director of the European Sustainable Investment Forum – or Eurosif – speaks to Blue & Green Tomorrow about how sustainable investment is thriving across the continent.
This piece originally featured in Blue & Green Tomorrow’s Guide to Sustainable Investment 2013.
What would you say is the general state of the sustainable investment market right now?
As evidenced by our recent reports published in 2012, the sustainable and responsible investment industry is witnessing rapid growth across Europe. If you consider all six strategies defined by Eurosif, from sustainably-themed, best-in-class to norms-based, ESG integration, engagement and voting and exclusions, these have grown each at double-digit growth between 2009 and 2011, while the overall asset management industry has grown by around 8% during the same period.
That growth, which of course covers various realities market by market, shows that institutional investors in particular are more and more recognising the importance of ESG factors. Some strategies are also getting some interesting traction and it will be interesting to see how they develop in the coming years. I am thinking here in particular about norms-based strategies, originally emanating from the Nordics but starting to percolate through other markets, including the UK, and about active ownership strategies which are continuing their steady growth and emerging in additional markets such as Italy or Spain.
The downside is that, in aggregate around Europe, retail investors have not yet really embraced sustainable and responsible investment (SRI). This remains an area where, apart from some exceptions where the market is developing, such as sustainably-themed funds in the UK or some defined contribution (DC) products in France, the demand remains relatively weak.
This is certainly not the case in the high net-worth individual (HNWI) segment where, as evidenced by our latest HNWI and Sustainable Investment Survey from November 2012, there is a lot of interest for sustainable investment, more and more seen as an investment discipline and a key component of inter-generational wealth preservation strategies.
Finally, Europe still leads the pack on a global basis and represents over 50% of the global sustainable and responsible investment market as shown by the first Global Sustainable Investment Review, a global SRI landscape published last month by the newly-formed Global Sustainable Investment Alliance, a global alliance of key SIFs worldwide to which Eurosif and UKSIF belong.
What would you highlight as the biggest opportunities in the market?
Not being a commercial organisation, this is a question I would answer differently. As said before, I believe that the institutional segment is a fast-growing one but one that has still a lot of potential for growth, especially in the mid-tier market. To date, our research shows that only 56% of corporate pension funds around Europe have a formal SRI policy. The larger funds would have one in general but beyond these, many are still either not recognising that ESG should be part of their fiduciary duty or wrestling with how to address this.
Another area of interest is certainly the impact investing area. For the first time, our European SRI Market Study published last October, included a review of that market. Although historic data using our methodology is not available, we have gathered evidence that this is a fast growing area, not surprisingly with HNWI but also some very large institutional investors.
In both of these segments, there is ample room for asset or wealth managers to develop product and investment solutions taking into account ESG factors.
Are there any particular barriers for growth?
I already mentioned the challenge related to fiduciary duty. Barriers for growth are multiple of course. I think that a key other one is the potential misalignment of incentives throughout the chain of intermediaries in the investment industry, which, and this is well-known by now, might and often result in short-term orientated behaviours. Sustainable and responsible investment is better aligned with the search for long-term outcomes, one of these outcomes being long-term views on financial returns.
The effect of taking into account ESG factors is typically magnified over the long time. This requires a shift in thinking and that shift can be efficiently eased by a better alignment of incentives, from asset owners and asset managers to the entire asset management value chain and the investee companies themselves. The current emerging thinking around shareholder stewardship codes across Europe, and the world really, might be very helpful in this respect.
What are the consequences of unsustainable investment and finance?
This is a wide subject that many analysts, more expert than me, have already commented upon, in particular in the context of the current economic and financial crisis. I’d like to move away from this for a minute and highlight another important aspect.
The International Energy Agency reckons that to reach a safe level of carbon emissions, an estimated $1 trillion investment in renewable and low-carbon technology is required every year above business as usual. To secure this, it is absolutely necessary to engage the private financial industry.
Further mainstreaming sustainable and responsible investment is a key way, if not the only one, to solve this equation. I was recently at a roundtable organised by the European commission to talk precisely about how private investments could be attracted to fund a resource-efficient Europe and they were very supportive of this idea.
Which countries in Europe would you pick out as key markets for sustainable investment?
With respect to size, the hierarchy of markets has not changed, overall, between 2009 and 2011, the years when we conducted our last European SRI Market Studies. France, the UK and the Netherlands would rank as top markets with regards to sustainable investment. Interestingly enough however, when looking at the details of each strategies, you might find signs of significant progress, starting from a low base, in several other markets, which is encouraging. This is for instance the case in Germany.
What’s your prediction as to how the market will look in 10 years?
Ten years sounds like a long time away and I do not have a crystal ball. All my previous comments however point into the direction of a growing market with a key role to be played by future regulatory or legislative drivers. To recycle your expression from before, I do not think that we will be able to speak any more about unsustainable finance or investment versus sustainable investment, rather an overwhelming majority of investments will have embraced some kind of sustainable approach, all leading to better allocation of invested capital in the market.
This approach will most likely be a combination of strategies. We can already see this coming with the growth of exclusions of certain sectors or practices, which is typically combined with another strategy. Also, I believe that this industry has not yet harnessed the full potential of ESG integration, despite the progress of assets covered by this strategy.