Thanks to the Governor of the Bank of England.
It is not often that on the eve of an article deadline The Governor of the Bank of England makes such a significant and relevant contribution to the subject matter of an article:
Mark Carney stated on 29 September 2015 at a City Dinner speech as follows:
“Nineteen per cent of FTSE 100 companies are in natural resource and extraction sectors; and a further 11 per cent by value are in power utilities, chemicals, construction and industrial goods sectors. Globally, these two tiers of companies between them account for around one third of equity and fixed income assets.
On the other hand, financing the de-carbonisation of our economy is a major opportunity for insurers as long-term investors. It implies a sweeping reallocation of resources and a technological revolution, with investment in long-term infrastructure assets at roughly quadruple the present rate.
For this to happen, “green” finance cannot conceivably remain a niche interest over the medium term.”
Once the need for rapid and immediate action is called for by none other than the Governor, it is time for even the doubters to step up and to start paying attention.
SRI – some background
Socially Responsible Investing is what it says, but it also encompasses impact investing, sustainable investing, ethical investing, green investing, socially conscious investing and responsible investing; namely investing adopting an investment policy that considers economic, social and corporate governance (ESG) factors to generate long-term competitive financial returns and positive impact on society.
Values often promoted in the context of SRI include fairness, justice, sustainability and certain industries are considered entirely at odds with such values, namely the arms trade, gambling, cigarettes, alcohol, and pornography.
But is SRI itself sustainable and does SRI pay?
Socially responsible Investment- recent trends
It is quite apparent that SRI is a growing phenomenon and is slowly moving away from the initial investor perception that SRI represents a compromise and that good intentions usually mean lower rates of return. Furthermore there are an increasing number of options for those seeking SRI.
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Morgan Stanley’s Institute of Sustainable Investing produced a report in April 2015 examining performance data from 10,228 open-end mutual funds and 2,874 separately managed accounts over the previous seven years.
The report concluded that investing in sustainability usually met, and often exceeded, the performance of comparable traditional investments. This was the case on both an absolute and a risk-adjusted basis, across asset classes and over time.
Over the longest time period analysed (between 2008-2014), Morgan Stanley found that sustainable equity funds met or exceeded median returns for five out of the six different equity classes examined (e.g., large-cap growth).
The report also concluded that long-term annual returns of the MSCI KLD 400 Social Index, which comprises firms scoring highly on environmental, social and governance (ESG) criteria, outperformed the S&P 500, a benchmark of the broader US stock market, by 45 basis points, since its inception in 1990.
These are interesting and convincing statistics. From a European perspective there is less recent information but similar trends can be detected. Eurosif is the leading pan-European sustainable and responsible investment (SRI) membership organisation, whose mission is to promote sustainability through European financial market.
Eurosif produced a report in 2014 comprising an extensive review of sustainable and responsible investment in Europe, covering 14 EU Member States.
Its principal findings are:
- That European Impact investing market has grown to an estimated €20 billion market.
- Netherlands remains the biggest market, but the UK has now surpassed Switzerland to become the second largest market for sustainability themed investments.
- In the last two years European Sustainability themed assets have increased by 11% per year to reach €59bn, with growth since 2005 years averaging 30.7% per annum.
- Exclusions, which is where certain investments or categories of investments are avoided or excluded by an investment portfolio as undesirable, have become ‘mainstream’ as a strategy, showing a very significant increase. Exclusions cover 41% (€7 trillion) of European total professionally managed assets.
- All SRI strategies covered by the report have continued to grow at double-digit rates since 2011.
- All forms of extra-financial (ESG) integration practices have grown by 65% between 2011 and 2013.
Establishing Norms, standards and suitable vehicles
At the same time as we see increasing focus on the benefits of SRI, there are now both standards and corporate vehicles emerging to cater for this phenomenon.
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Norms based screening is described by Eurosif as “screening of investments according to their compliance with international standards and norms”. The norms that are followed to ensure fair and right treatment of workers and of the environment are indicated by authoritative national and international bodies.
Examples include United Nations Global Compact which is an initiative to encourage businesses worldwide to adopt sustainable and socially responsible policies, and to report on their implementation, and the International Labour Organisation (ILO) promoting healthy workplace practices.
In the UK CICs, community interest companies, and in the US, B Corps, Benefit Corporations, reflect determined legislative attempts to create vehicles for sustainable orientated businesses.
Socially Responsible Investing is here to stay and the likelihood is that it may in due course become not just a good to have, but obligatory.