by Mark Robertson, Head of Communications, EIRIS
In many respects 2012 was a big year for green and ethical investment. Calls for a more responsible approach to capitalism are growing, along with the sense that a more sophisticated understanding of investment risk – one which takes longer-term sustainability issues into account – is urgently required.
June 2012 saw the United Nations (UN) Conference on Sustainable Development take place in Rio de Janeiro, Brazil. Though widely criticised for failing to deliver the government commitments and practical actions needed to shift the global economy onto a sustainable path, there were some positive aspects to the conference.
A number of finance CEOs announced their commitment to the Natural Capital Declaration – a statement by and for the financial sector to work towards integrating natural capital considerations into lending, investment and insurance products and services. Natural capital comprises the earth’s natural assets and the ecosystem services resulting from them which make human life possible. Ecosystem goods and services from Natural Capital are worth trillions of Euros per year and constitute food, fibre, water, health, energy, climate security and other essential services for everyone. Presently, neither these services, nor the stock of Natural Capital that provides them, are adequately valued compared to social and financial capital. The Natural Capital Declaration seeks to address this imbalance.
At Rio, the Corporate Sustainability Reporting Coalition also called on UN member states to commit to develop a policy framework on corporate sustainability reporting and advocated effective mechanisms for investors to hold companies to account on the quality of their disclosure on environmental, social and governance (ESG) issues.
The global financial crisis and other high-profile ESG failings have highlighted the increasing importance of companies having business strategies that are sustainable over both the short and the long-term. Integrating ESG considerations into financial decisions is critical in supporting efforts to tackle the pressing issues of climate change, food, water and energy scarcity, and human rights. Such an ambitious task requires a concerted response.
Green and ethical funds can play a key role in driving improvements in the companies within which they invest, but it’s clear that financial institutions around the world need to do much more to ensure that long-term, sustainable business values which brings benefits to profits, people and the planet become the norm. Evidence suggests that a large chunk of investors across Europe would agree. In the UK, a 2012 YouGov poll for National Ethical Investment Week found that 55% of adults in Great Britain with investments want their bank or financial adviser to tell them more about ‘impact investments’, ie: investments that produce both a financial and a social or environmental benefit.
The good news is that momentum is shifting things in the right direction and the amount of money invested responsibly in key markets around the world is increasing.
Latest statistics from EIRIS show that there’s currently around £11bn invested in around 100 green and ethical funds, up from £4bn 10 years ago. In the summer of 2012, ethical banks attracted more than 100,000 new customers at a time when many high street banks were hit by a series of scandals including Libor fixing at Barclays, and HSBC and Standard Chartered falling foul of American regulators.
Across Europe, investors are adopting an array of responsible-investment strategies, often in combination: sustainability-themed, best-in-class, norms-based screening, Exclusions, ESG Integration, engagement/voting and Impact investments. According to EUROSIFs 5th SRI Study the growth of each responsible investment strategy covered has been stronger than broader asset management market growth.
In the USA the picture is also one of growth. According to the US Forum for Responsible and Sustainable Investment, broad-based sustainable and SRI approaches encompassed an estimated $3.07 trillion out of $25.2 trillion in the US investment marketplace as at December 2010. From 2007 to 2010, SRI assets increased more than 13% compared to all investment assets under management which edged up by less than 1%.
So what’s behind the growth in green and ethical investment and which factors are likely to increase demand?
Sustainability megatrends will continue to make the case for long-term, sustainable investment. There is a growing need to ‘do more with less’ in the context of population growth, climate change and resource availability, particularly with regards to pollution, and the consumption of energy and water resources. Those investors that reduce risk and maximise investment opportunities by seeking out companies which have the best performance on ESG issues, or by engaging with companies to improve performance, will be best placed to manage the global challenges that are coming our way.
At the same time, growing consumer interest in green and ethical issues such as climate change, animal welfare, fair trade and human rights and the environment is encouraging more consumers to consider green and ethical financial products.
Corporate scandals and high-profile failings at big companies continue to shine a spotlight on sustainable investment. You only have to look at failures at BP, News Corporation, Vedanta and Olympus to see the importance of understanding and improving corporate performance on ESG issues.
There’s now greater accountability and more focus on the extent to which investee companies are compliant with global norms and conventions such as the UN Global Compact and the UN Environment Programme Finance Initiative. Investors are becoming more active shareholders by engaging with companies to improve their sustainability performance and integrating ESG issues into voting decisions, especially on key issues such as executive pay.
In recent years, an increasing number of stock exchanges around the world have also implemented initiatives which are driving real improvements in corporate disclosure and performance on ESG issues.
Mainstreaming green and ethical investment is about ensuring a good range of green and ethical financial products are available to all consumers across all aspects of ethical finance. But it’s also about ensuring that retail fund managers embed sustainable investment principles across all funds under management, not just in the green and ethical funds they offer.
This might mean engaging with investee companies to improve their performance on key issues such as climate change, environment, biodiversity and human rights. Or integrating ESG factors into investment decisions to reduce risk and identify investment opportunities. It can also mean making a commitment to join relevant sustainable initiatives such as the Equator Principles or the Principles for Responsible Investment.
Given the credit crunch and financial crisis, plus unethical behaviour at scandal-hit banks, it’s not surprising that growing numbers of consumers across Europe and elsewhere are interested in financial products that offer a more ethical, sustainable and long-term approach to finance.
Looking ahead, we need a greater range of financial products that enable investors to invest in line with their ethics and to provide access to the many exciting new types of sustainable investment themes and opportunities which exist. For green and ethical investment to be really effective we also need mainstream fund managers to report back to their customers on how they are adopting longer-term sustainable investment principles across all their investments.
EIRIS is an independent, not-for-profit organisation, providing research into corporate environmental, social and governance performance. Further info at: http://www.eiris.org/
