Socially responsible investment (SRI) hit $11 trillion in 2010. The increase was due to demand from European pension funds, universities and insurance companies and high net worth individuals (HNWIs).
Hedge fund managers have been urged to stop considering SRI as an eccentric offshoot of the alternative investment industry and instead view it as a major source of fresh capital.
Alternatives and hedge fund assets represent only 5.6% of the total European SRI assets under management with the greatest contributions from Finland, Denmark and Sweden, according to statistics from the European Sustainable Investment Forum (Eurosif).
According to Eurosif SRI investments could grow by 18% to 20% over the next two years.
Most of the SRI investment is driven by Nordic countries where large pension funds are moving into new asset classes. Although still marginal at the European level, SRI money market funds have particularly gained momentum in France and Spain, said Eurosif.
In its latest SRI report Eurosif said of Sweden: “Given the increase in alternative investments, asset managers are likely to experience increased pressure from investors to better accommodate for SRI in hedge funds, private equity and real estate.”
These were sentiments repeated at the February sustainable and responsible investment conference organised by the Association of the Luxembourg Fund Industry (Alfi). The meeting highlighted the fact major institutional investors show continued and rising interest in SRI.
HNWIs have also demonstrated greater interest in SRI. They contributed to the rise in European SRI assets under management (AUM) which have risen from $2.7 trillion in 2007 to $5 trillion in 2010. Despite the increased emphasis on ethical investing, HNWIs allocate only an estimated 11% to SRI strategies.
Institutional investors currently represent 92% of total SRI AUM globally and are particularly active in large European markets including the Netherlands, Switzerland, the UK and Nordic countries. According to the Eurosif 2010 SRI study, European investment in this area is “undergoing a transformatic period”.
It said a “vast majority of SRI investors predict that demand from institutional investors will be the main driver for SRI growth in the next three years. Other important drivers include demand from retail investors, media coverage, legislation and international initiatives.”
Pension funds in particular are interested in climate-friendly investment, according to David Harris, head of responsible investment at FTSE Group.
Nathalie Dogniez, a partner at KPMG, said that interest in SRI is an enduring trend that hedge funds should take into consideration. Only a small number are taking SRI seriously, she said.
EACM Advisors, an investment advisory company specialising in multi-manager investment programmes for institutions and HNWIs with around $4.5 billion AUM which is mostly in funds of hedge funds (FoHFs), is one example. EACM runs a multi-strategy FoHF with a social responsibility mandate focused on faith-based, ethical principles. The company, acquired as a subsidiary of the Bank of New York Mellon in 2004, manages around $3.6 billion in FoHFs across two basic product lines.
At the conference to debate progress in SRI, former president of the European Commission Jacques Santer noted the need for sustainable, responsible and profitable investment.
The move towards more ethical investment, he said, is widespread. Santer pointed out that 882 institutional investors have now signed the UN Principles for Responsible Investment (PRI), launched in 2006.
“We have never witnessed such a strong movement of solidarity,” Santer commented.
This movement was in part triggered by the financial crisis which was “a crisis of ethics for the financial sector,” he said.
According to Santer the interest in SRI unleashed by the crisis is not a short-term fad. “Social investment has increased because of and in spite of the financial crisis,” Santer stated.
Matt Christensen, executive director of Eurosif, agreed that SRI was a lasting trend and attributed this in part to the increasing influential role women are playing in the financial industry.
“Women are a key reason for investors getting involved in socially responsible investment,” he said.
According to Christensen’s estimates, the proportion of SRI investment from the European region has risen from 35% of the $3.6 trillion total in 2006 to 72% of the $11 trillion total in 2010. In the same period US SRI involvement has diminished: in 2006 he estimated the US represented 64% of total SRI, sinking to 28% by 2010.
Christensen said institutional demands coupled with international initiatives such as the UN PRI as well as external pressure from non-governmental organisations (NGOs), the media and trade unions will continue to push demand for SRI.