European sustainable and responsible investment assets under management climbed to €2.7 trillion ($3.6 trillion) at the end of 2007, a 157% increase from two years earlier, according to a study released earlier this month.
About 50% of those assets were invested in equities and 39% in bonds, according to the biennial study published by Paris-based European Social Investment Forum, an industry organization with members that include pension funds, asset managers and consultants.
About 4%, or €56.6 billion, of total SRI assets are invested in real estate, 1.4% in private equity and venture capital, 1.3% in hedge funds and the remainder in commodities. Most of the alternative SRI assets are managed on behalf of Dutch investors, including the €205 billion Stichting Pensioenfonds ABP, Heerlen, and the €88 billion Pensioenfonds Zorg en Welzijn, Zeist, according to the study.
“One of the biggest changes (in SRI) is that pension funds are moving beyond just investing in equities to all other asset classes,” said Matt Christensen, executive director of Eurosif. “Investors used to only talk about SRI in terms of equities. They're realizing that actually they should be looking at other asset classes — from real estate to fixed income to private equity to hedge funds. This is an acknowledgement that these (SRI) risks do matter, in all areas of investments.”
Segregated mandates account for about 82% of total SRI assets under management, while another 12% is invested in mutual funds. Structured products, funds of funds and other types of investments account for the remainder. Funds of funds, although still “marginal,” have grown steadily over the past two years and now total about €2.4 billion in assets, according to the study.
European investors account for about 53% of total global SRI investments, according to the study. The U.S. accounts for 39%, with about $2.7 trillion in SRI assets. The remainder comes mostly from Canada and Australia.
“I think U.S. pension funds will be shifting into SRI in a big way,” Mr. Christensen said. “SRI management is long-term investment management, and pension funds are long-term investors.”
Thematic funds — strategies that follow certain environmental, social and governance convictions such as climate change — are a relatively new approach to SRI. Because thematic portfolios focus on ideas in which investors see strong growth potential rather than negative screening of specific companies or industries, the strategies themselves usually allow for a broader opportunity set as well as better diversification, according to the study.
One early user of thematic funds is Henderson Global Investors Ltd., London. Henderson is expanding into the U.S., with the launch in August of its global SRI thematic strategy for institutional and retail investors, said George Latham, the London-based head of SRI funds.
Earlier this year, Henderson's portfolio managers reduced the fund's exposure to clean energy as concerns grew over valuations. “We then looked to invest more in health care since that sector would tend to be less impacted by an economic downturn,” Mr. Latham added. “The way we've constructed (the strategy) is very well diversified. ... Year-to-date performance has been relatively strong.”
Henderson's Industries of the Future Fund returned 3.58% on an annualized basis for the three years ended Sept. 30, compared with 1.02% for the Morgan Stanley (MS) Capital International World index, according to data provided by the firm.
For the 12 months ended Sept. 30, the fund returned -12.79% compared with -14.98% for the index.
Henderson reported £56.2 billion ($97.2 billion) in assets under management, including £710 million in SRI strategies at the end of June.
“To a certain extent, the ESG principles that are embraced by the responsible investment community may serve to encourage practices that will help the (broader) market to function better in the long term,” said Danyelle Guyatt, principal in the responsible investment team at Mercer LLC in London. Earlier this year, Mercer expanded its ESG research to include all asset managers on its database.
The financial turmoil likely will affect SRI strategies, with redemption rates expected to rise, according to the study. However, growth is expected over the next two to three years.
One key driver for growth in SRI over the past two years is the United Nations Principles of Responsible Investments, which was introduced in 2006 and has been signed by more than 400 institutions responsible for about $15 trillion, according to the study. In the past two years, many pension funds, including ABP, expanded their SRI teams to integrate environmental, social and governance factors into the investment process.
“An important reason for growth (in SRI mandates) has been the regulatory environment,” Mr. Christensen said.
As of January 2008, certain occupational pension fund sponsors in Italy are required to disclose how they're taking ESG factors into account in their investment strategies Spain is considering similar measures, according to the study.
Pension systems in the U.K., France, Germany, Sweden, Belgium, Norway and Austria already follow at least some SRI-related regulations.
The study was conducted from April to June using year-end 2007 data.
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