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GreenMoney Journal - publishing since 1992
Winter 2009/10 issue
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Socially Responsible Investing gains ground worldwide
Funds International
The fallout from financial scandals is causing investors to vote with their feet, moving into funds
that really pay attention - and not just lip-service - to ethics and the environment when it comes
to selecting their investment vehicles
Growing concerns over environmental and social issues and the fallout from corporate scandals, such
as Enron and Worldcom in the US and Parmalat in Italy, are fast moving socially responsible
investment (SRI) into the mainstream market.
According to the Social Investment Forum
(SIF), an independent organisation, total assets under management (AuM) in the US which use
screening processes linked to ethics, the environment or corporate social responsibility total over
$2 trillion or some 11 percent of all assets professionally managed there.
An indicator of
SRI's strong gains is that in a 1995 study, SIF identified a total of $639 billion in SRI assets in
the US.
SRI mutual funds originated in the US with the launch, in August 1971, of the Pax
World Fund (now Pax World Balanced Fund) which now manages total assets of about $150 billion.
There are now 28 management firms offering 175 SRI funds, of which four have already exceeded the
$1 billion asset-mark.
The two largest are managed by Chicago-based Ariel Capital
Management, with its Ariel Mutual Fund and Ariel Appreciation Fund having assets of $4.2 billion
and $3.2 billion, respectively. The third-largest is Portsmouth, New Hampshire-based Pax World
Fund's World Balanced Fund with assets of $1.5 billion, followed by Providence, Rhode Island-based
Domini Social Investments' $1.3 billion Social Equity Fund.
In the US, exchange traded
funds have also begun moving into the SRI market with the listing of Barclays Global Investors'
iShares KLD Select Social Index Fund on the New York Stock Exchange in January 2005. PowerShares
followed suit with the listing in March of its WilderHill Clean Energy Portfolio.
In
Europe, SRI-linked assets stand at almost E340 billion ($435 billion) according to the European
Social Investment Forum (Eurosif), the European Commission-backed sustainable and responsible
investment body.
But while a recent study by Eurosif revealed that SRI has become a
prominent consideration for European investors, its adoption has generally been slow except in the
UK (which accounts for about 90 percent of total SRI-linked investments) and the Netherlands (which
has the second-largest SRI market relative to total AuM).
As in the US, retail funds
account for a comparatively small portion of European SRI AuM. According to a report by E.Capital
Partners (ECP), a Milan-based SRI advisory firm, total retail assets managed at the end of 2004
were E23.87 billion, with the three-year average annual growth rate standing at 7.1 percent. ECP
added that the number of SRI retail mutual funds in Europe increased by 48 to 423 in 2004; ten
years earlier it had stood at only 73 funds.
The UK has one of the world's major SRI
retail markets with over 60 retail funds offered by 36 management firms housing #4.2 billion ($7.9
billion) from almost half a million investors. The largest retail SRI product marketed in the UK is
Dorking-based Friends Provident Life and Pensions' Stewardship Pension Fund with assets of #835
million.
UK SRI mutual funds tend to be medium-sized with assets ranging from #20 million
to #90 million; the largest is Edinburgh-registered F&C Fund Management's #617 million Stewardship
Growth Fund.
The second-largest SRI mutual fund is Framlington Group's Health Fund, with
assets of #385 million. Other larger funds include Scottish Widows' Investor Fund (#188 million in
assets) and the Jupiter Unit Trust Managers' Ecology Fund (#136 million).
The F&C
(formerly Isis) Stewardship Growth Fund and Friends Provident's Stewardship Pension Fund were the
first UK ethical funds and both launched in June 1984.
UK SRI retail assets represent
about 17 percent of the European total; but this proportion is down from about a quarter of total
assets in 2001, indicating the growing popularity of SRI in other European countries.
Findings of a Eurosif survey indicate that Europe is likely to continue making strong headway
in the SRI arena. In France, for example, though SRI institutional assets total only about E3.7
billion, 62 percent of institutional investors are planning to invest in SRI funds by 2006.
A similar survey of 41 French institutional investors, undertaken by French SRI service
organisation Novethic and asset management firms Amadeis and Lombard Odier Darier Hentsch, found
that 46 percent have already made at least one SRI investment and almost two-thirds said they would
invest in SRI funds by 2006.
But while French institutional investors have been slow off
the mark, France's retail SRI mutual funds have made impressive headway. According to Novethic,
which is a subsidiary of the state-owned financial services organisation Caisse des depots et
consignations, total AuM by open-ended SRI funds available in the French market - including both
domestic and foreign funds - exceeded E5 billion in 2004, compared with E4.4 billion at the end of
2003 and E2.5 billion in 2002.
At the end 2004, a total of 122 funds were available to
investors in the French market compared with 108 in 2003 and 80 at the end of 2002.
Luxembourg-based Dexia Asset Management was the biggest provider, with total SRI AuM of just over
E1 billion.
Novethic said another highlight of 2004 was the significant increase in SRI
assets managed by French firms. These totalled some E3.6 billion at the end of 2004, a 24 percent
increase over 2003's E2.9 billion and almost four times as much as the E920 million managed in
2001.
The largest French manager was BNP Paribas Asset Management, with SRI AuM of about
E1 billion.
SRI funds are also making strong advances in Italy. According to ECP, retail
SRI fund assets stood at E2.2 billion at the end of 2004, a 47 percent increase compared with E1.5
billion in 2003 and E1.2 billion in 2002.
With SRI assets of about E1 billion, the largest
of Italy's SRI fund managers is Pioneer Investments, an international firm owned by Italian banking
group UniCredito Italiano.
According to the Sustainable Investment Research International
Group, a coalition of 12 research organisations promoting the advancement of social investing, as
at 30 June 2004 other major retail SRI markets in Europe were: Sweden at E2 billion total assets;
the Netherlands (E1.61 billion); Belgium (E1.34 billion); Austria (E978 million); and Germany (E869
million).
The spread of assets across all European SRI mutual funds was: equity, 64.7
percent; balanced, 14.0 percent; and fixed income, 21.4 percent.
In other parts of the
world SRI investment tends to remain concentrated in English-speaking countries. Canada has the
largest SRI asset management industry outside of the US and the UK with total assets of about C$50
billion ($41 billion), according to Canada's Social Investment Organisation.
Canada's
first SRI mutual fund, the Ethical Growth Fund, was launched by Vancouver-based The Ethical Funds
Company in 1986. The firm remains one of Canada's largest SRI mutual fund players with a total of
C$1.5 billion of AuM. In all, 23 firms now offer 58 SRI funds in Canada with total AuM of about
C$11 billion.
With assets of C$2.1 billion, the Investors Summa Fund, managed by
Winnipeg-based Investors Group, is Canada's largest SRI fund.
In Australia, SRI investment
is fast becoming a key consideration amongst many investors. In its latest SRI Benchmarking Survey,
the Australian Ethical Investment Association (AEIA) said that total assets managed in terms of an
SRI mandate increased by 41 percent to A$21.5 billion ($16.6 billion) in the 12 months to June
2004.
This pace, added the AEIA, was more than double that of the Australian retail and
wholesale investment market, while SRI-linked assets had increased by 920 percent between June 2001
and June 2004.
Of total assets under management as at June 2004, the AEIA said A$3.3
billion were in 89 managed SRI funds, while A$7.2 billion were investments by religious
organisations and A$7.2 billion in superannuation funds using an SRI-overlay approach.
A
major driving force behind the growth of SRI in Australia was the inclusion of legislation in the
Financial Services Reform Act which, since March 2003, has compelled all investment firms to
include descriptions in their product disclosure statements of the extent to which labour standards
or environmental, social or ethical considerations are taken into account.
In contrast
with Australia, the AEIA says New Zealand has a very small SRI sector with assets of only A$19
million. However, New Zealand is to enact legislation relating to SRI issues that is broadly
similar to that of Australia.
In South Africa a report by the Ministry of Finance
published early in 2002 put total SRI-linked assets at ZAR18.6 billion ($6.2 billion) or only 1.6
percent of total AuM in the country. And while there are about 20 funds focused on SRI only three
are mutual funds available to the public.
Total assets of the funds as at 31 December 2004
were ZAR2.83 billion, the largest being Old Mutual Asset Managers' Community Growth Fund with
assets of ZAR1.7 billion.
Elsewhere in the world SRI is taking root slowly. In Japan,
which is regarded as the most promising SRI non-English speaking market, a study published in
December 2004 by the Daiwa Investor Relations Company reported that 35 percent of fund managers and
analysts said that SRI influences their investment decisions.
This was up from the 14.3
percent recorded in a similar survey conducted in April 2004. The jolt, said the report, was
provided by a number of corporate scandals in Japan in 2004.
The first Japanese SRI mutual
fund, the Nikko Eco Fund, was launched in August 1999 by Tokyo-based asset manager Nikko Cordial.
There are now 11 funds with total assets of about $1 billion. It is worth noting that
while most funds focus on environmental issues, the latest addition to the Japanese SRI sector,
Daiwa Securities' Daiwa Socially Responsible Investment Fund (launched in April 2004) is the first
in Japan to use the transparency and ethics compliance management of firms as investment criteria.
This shift in Japan follows a similar trend elsewhere. While SRI funds tended to confine
their activities to screening processes to eliminate shares of firms involved in industries such as
alcohol, tobacco, gambling and armaments, a more recent trend has been to include a focus on issues
related to corporate governance.
Since the late 1990s in particular, SRI funds have become
more involved in direct interaction with the management of firms in which they are invested.
Referred to as 'engagement' or 'active ownership,' this entails, for example, voting at annual
general meetings in a manner that ensures that firms are run by managers and directors in the best
long-term interest of shareholders.
Dialogue also takes place with firms where SRI fund
managers believe governance and issues of strategy and social and environmental management need
resolution.
The importance of sound governance is also increasingly coming to the fore in
terms of investor perceptions and actual performance of firms applying strict rules. For example, a
survey commissioned in 2002 by CSR Europe, a nonprofit organisation promoting corporate social
responsibility, revealed that 50 percent of European investors and 61 percent of US investors had
decided not to invest in a firm, or had reduced their investment, because of poor governance
practices.
The thinking among mutual fund investors appears to be similar. In November
2003, a survey by Bethesda, Maryland-based Calvert Group, which manages SRI funds with total assets
of $10 billion, found that 93 percent of investors believed their financial adviser should
investigate the ethical as well as financial performance of investments before making investment
recommendations.
The survey, undertaken for Calvert by Harris Interactive, also found that
84 percent of people were more likely to invest in a mutual fund emphasising firms that engage in
ethical business practices, while 71 percent felt that those operating with higher levels of
integrity carried lower investment risk and delivered higher investment returns. A similar study in
the UK by Friends Provident Life and Pensions found that 65 percent of investors are now interested
in investing their money in a socially responsible way.
There have also been innumerable
studies on the issue of governance and share performance and all have drawn a similar conclusion:
the two are closely correlated. One of the more recent of these studies, undertaken by the UK's
Institute of Business Ethics in 2003, revealed that firms with a public commitment to ethics
performed better on three out of four financial measures than those without and, on average,
produced 18 percent higher profits.
These findings would also appear to be corroborated by
the performance of many SRI mutual funds. Among these is the $1.5 billion Pax World Balanced Fund.
According to US research firm Lipper, in the ten years to 31 December 2004 Pax's fund came in at
number 13 out of 162 balanced funds with an average annual total return of 11.74 percent, compared
with the Lipper index average annual total return of 9.09 percent over the same period.
The fund follows a screening policy which excludes firms involved in areas such as liquor and
weapons and also engages in shareholder activism.
The UK's oldest SRI fund, the Friends
Provident Stewardship Pension Fund, has also acquitted itself well, ranking within the top quartile
of its peer-fund group, the UK All Companies sector, over periods ranging from six months to ten
years up to 28 February 2005.
The fund's criteria exclude investment in firms involved in,
for example, weapons, nuclear power, tobacco, alcohol and gambling.
The development of SRI
funds is being assisted by the release of an increasing number of benchmark indexes. The first of
these were the US- based Dow Jones' Sustainability Indexes (DSI) launched in 1999.
Currently 50 DJSI licences are issued to asset managers in 14 countries managing products
including active and passive funds with total assets of E2.8 billion.
In 2001 the UK's
FTSE Group followed with the launch of its FTSE4Good Index series, which is designed to measure the
performance of companies that meet globally recognised corporate responsibility standards. There
are five FTSE4Good indexes covering the UK, US, Europe, Japan and global developed markets.
A number of SRI research firms also provide indexes. These include ECP, which has six European
equity and bond indexes and a global equity index covering 300 companies in 24 developed markets.
Other country-specific SRI indexes include the South African JSE SRI Index (launched by
the Johannesburg Securities Exchange in May 2004), the Australian SAM Sustainability Index
(launched by the SAM Group, a Swiss-based SRI asset management firm, in February) and the Tel-Aviv
Stock Exchange's Maala SRI Index (also launched in February).
Copyright 2005 Lafferty Ltd
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