Strategies aimed at directly impacting society are becoming more popular among European investors focused on green and social investing, according to a Eurosif report.
Socially responsible investing (SRI) keeps drawing solid interest in the EU, NGO Eurosif found in its latest survey: assets invested in financial instruments such as green bonds and micro-finance ventures grew 21,7% to €16,8 trillion between 2011 and 2013 in 13 European countries.
The report also scrutinizes trends in seven SRI strategies such as ‘Exclusion’, that is, banning investments in companies active in the production of land mines, for example.
Out of these, the rapid rise of the ‘Engagement and voting’ (EV) and ‘Impact investing’ (II) strategies stands out and “signals changes in attitudes toward stewardship amongst European investors” observes the NGO.
Capital allocation to EV, which implies active shareholder voting and engagement with companies in order to influence their behaviour or increase their disclosure on environmental, social and governance (ESG) matters, grew an impressive 86% over the period, reaching €3,275,930 million.
Fund flows to II strategies jumped a whopping 132%, topping €20,000 million, making it the fastest growing SRI strategy. II implies that investors target both financial and social or ‘green’ returns that are measurable.
Examples include Legal & General’s £15 billion commitment to invest in transport and energy infrastructure projects, and in care homes and hospitals, or Axa Group’s €150 million commitment to invest in themes such as climate change and health through microfinance, and private equity funds and with a targeted annual return of 4 to 8%.
Investment vehicles used in II mostly belong to the alternative category–concrete projects (a hospital…) or micro-finance—instead of conventional stocks and bonds, for example.
Thus, they mostly appeal to high net worth individuals which, unlike institutional investors such as pension funds or insurers, do not face strict regulatory constraints about the type of assets they invest in.
Reluctance from institutional investors stems in part from the absence of track records on financial performance for II investments in comparison to more mainstream products. Also, II projects can be relatively small in size, and therefore lack scale, whereas for most institutions, a single investment, must amount to a minimum of €5 million.
According to the survey, institutional investors are seen as the number one driver of future SRI growth. Anecdotal evidence suggests that II may be on the upswing in that constituency.
Separately, foundations “represent another potential important source of funding” although national legislative frameworks may slow their engagement in the market. For example, in Germany, foundations must prioritize capital preservation, which limits II and its riskier profile.
Going forward, Eurosif’s survey shows that alongside institutional investors, the legislative framework is seen as the biggest driver of future demand for SRI investments. In particular, the EU Commission’s proposal on a revised shareholder rights directive, which will be examined by Parliament and Council, should support investors’ active role in shaping more sustainable corporate practices.
Socially responsible investment (SRI) is a topic of growing relevance. It is becoming common that fund managers offer ethical funds or green funds for customers that are interested in SRI. In some countries, such as the UK, Belgium and Germany, SRI is also part of pension funds.