Can you afford not to care?

Swedish asset managers had more than just Mifid 2 to think about as 2018 dawned – January also saw the implementation of a new rule forcing funds there to report their management of various sustainability aspects. Along with a handful of other countries, Sweden has long been at the cutting edge of sustainable investment in Europe, and this takes it a step further. Importantly, how local players cope with the new legislation should prove instructive for asset managers elsewhere. Why? Because the European Commission is keen to build similar pan-European rules into all asset managers’ fiduciary duties.

The backlash to this proposal has already begun, driven by fears that it could descend into an ineffective box-ticking exercise – but I think the naysayers could be missing a trick. Whether or not sustainability reporting is made compulsory, demand for sustainable investment funds has been building some substantial traction in Europe. Sustainable retail funds enjoyed their best net flows on record in 2017 – it seems that going green can be good for business!

And with that last sentence, I’ve opened a can of worms (organic, environmentally-friendly ones, of course). ‘Green’ is just one of multiple labels that fall under the umbrella of sustainability, with ‘SRI’ (socially responsible investments), ‘ESG’ (environment, social and governance) and ‘impact investing’ also common. Throw in the myriad strategies employed to construct sustainable portfolios – be it best in class, exclusion, or norms-based – and it rapidly becomes clear that sustainable investment can be a somewhat nebulous concept.

Still, that doesn’t have to be a problem. Unlike many traditional investment strategies, which can be difficult for retail investors to fathom, sustainable investment funds tell compelling stories that investors want to hear. Different approaches will appeal to different people – an investor may want to buy into renewable energy, avoid any investment in firearms, or simply hold a basket of companies that are deemed the most sustainable in their field.

According to many of the professional selectors we interview each year, the appetite for sustainable funds often stems from the end-client (a selection of recent selector comments can be read at the end of this blog). Good sustainable investments are doubly exciting because of their potential future performance, and potential difference they can make to the future of the world – a sentiment that I share. You may be tempted to ascribe this to the optimism of youth, with the millennial generation (of which I am just about a member, despite my greying hair) often cited as a driving force behind the interest in sustainability. However, the fact is that millennials don’t have all that much money compared to older generations so the inflows into sustainable funds can’t be stemming from them alone.

But don’t go getting any ideas that building out your sustainability competencies will be a walk in the park – or any other nature-related metaphor. Bolting on a single SRI product to a wider range of traditional strategies will be good enough for some investors, but others are averse to what they see as greenwashing – an apparent commitment to sustainability that amounts to little more than lip service. Groups that take the subject of sustainability more seriously will benefit from differentiation in what is still a relatively immature space (at least where retail investment is concerned), in turn bolstering the appeal of their brand.

Numerous asset managers are already veterans of the sustainability business – beyond Sweden, names such as Robeco, Candriam, and Hermes spring to mind as leaders. Others are diving in – Germany’s Union Investment recently announced its intention to embed ESG criteria into all of its funds. And some may not trumpet their SRI credentials but nevertheless do pay attention to them – in response to recent criticism of having no responsible investment team, Carmignac retorted that its portfolio managers were encouraged to apply ethical criteria to their funds as they see fit, as well as setting high vote-participation rates for the AGMs of companies they invest in.

Yet many more have still to plant seeds in the field of sustainable investment. If you are one of them – and bearing in mind activity at the European Commission – the question is: can you afford not to care?

For more on sustainable investment funds, the April 2018 edition of Fund Radar Second Sight covers this topic in depth.

Recent selector comments on responsible investment:

‘The theme of ESG (environmental, social and corporate governance) will be one important driver of fund-industry change, especially in the Nordic countries. I think, too, that ESG orientation is not something that can be incorporated into ‘active’ funds that are not managed in a truly active manner.’ Sweden – Advisory Portfolio Manager

‘We work with a comprehensive list of criteria relating to ethical and sustainability issues from a specialised rating agency. The products and companies it approves of will then be filtered a second time, according to our criteria. In the final stage, our ethics and investment committee will evaluate the results and sign off the qualifying products. We don’t do ‘greenwashing’ and therefore investigate the decision-making processes of the companies thoroughly.’ Germany – Retail Bank

‘I think that everything to do with SRI and ESG etc will become enormous. We need therefore, regardless of the underlying asset types, pure and genuine SRI – not just labels, but investment processes that include SRI considerations from the outset.’ Belgium / Luxembourg – Advisory Portfolio Manager

‘We are seeing an increasing demand from our clients for funds with a sustainable-investment / SRI orientation.’ Sweden – Insurance