by Detlef Glow.
Even as funds investing with socially responsible investment/environmental, social, and corporate governance (SRI/ESG) mandates gather a lot of attention from potential investors, in a number of markets they are still far from mainstream investments.
The importance of sustainable investment approaches in Europe is shown by the initiatives in Luxembourg and Liechtenstein; these two countries have started to offer special SRI/ESG services for fund managers and promoters to strengthen their position as fund hubs in Europe. To evaluate the current state of the industry and possible future trends, Detlef Glow has spoken with Mr. Volker Weber, Chairman of the Board of the Forum Nachhaltige Geldanlagen (FNG), the social investment forum (SIF) of the German-speaking markets (Austria, Germany, Liechtenstein, and Switzerland).
Mr. Weber, according to the statistics of the FNG, the assets under management in mutual funds, mandates, and other financial products managed with an SRI/ESG approach in the German-speaking markets showed a growth rate of 17.23% for 2013. What is your expected growth rate for the foreseeable future?
We are expecting a growth rate of 50% over the next three years for products and mandates with a sustainable investment approach. We also believe there will be a significant increase in the usage of SRI/ESG asset overlays as more and more asset managers take sustainable investment criteria, such as the general exclusion of speculation with soft commodities or investments in producers of landmines and other weapons, into consideration for all of their portfolios.
Even though these asset overlays can’t be considered real sustainable investment approaches, the increasing use of these criteria allows us to summarize that SRI/ESG has left its niche status and has reached the mainstream investor.
Graph1. Assets Under Management in Mutual Funds, Mandates, and Other Financial Products With a Sustainable Investment Approach (Bil Euros)
Source: Forum Nachhaltige Geldanlagen (FNG)
What will be the drivers for this growth?
We see that sustainable investment strategies have become a topic of interest for institutional investors. Especially, foundations are undertaking reviews of their investments to align their capital stock with the intentions of the endowment. These activities should lead to significant inflows into funds as well as into mandates over the next few years.
In addition, we realize that more and more private organizations and associations are showing interest in this kind of investment strategy, which could be a driver for further growth in the retail segment.
We also see a lot of interest in sustainable investment products directly from retail investors, since investors have started to care about the impact of their investment products in terms of their social and environmental performance. This trend has already led product promoters to publish nonfinancial key figures such as the carbon footprint of their products.
Is this trend also reflected in the products?
From our point of view the fund industry has started to adapt the needs of investors to their products, shown in the fact that products are more differentiated nowadays, i.e., funds offer more specialised investment objectives with regard to their investment approach instead of trying to deliver a “one size fits all” solution. This new generation of products has the advantage that investors can choose investment products that better fit their individual needs.
We have also observed a trend toward so-called impact investing, meaning investors want to do (direct) investments that have a visible impact. The bandwidth for these investments reaches from microfinance to private/public partnerships. It is remarkable that there is a strong demand for investments in private/public partnerships in the sector of social engagement.
What actions should fund promoters take to ensure their future growth?
First of all, the industry needs to speak in one language, since the use of many different terms for the same subject leads to confusion on the investor side. It would also be helpful if the industry would develop a single standard for their research data pools; this would reduce costs and would lead to a wider integration of SRI/ESG criteria into the asset management industry.
A number of studies show there is a lack of understanding about sustainable investments; therefore, the industry needs to educate investors and advisors on what sustainable investment means, how it works, and what results are to be expected from the different kinds of investment in this area.
Luxembourg has started to offer special services for fund managers and promoters in the SRI/ESG space to strengthen its position in Europe. What do you think about this initiative?
We welcome this initiative, since Luxembourg is a first mover in this regard and will pave the way for other fund hubs. Another fund hub that is very active in the SRI/ESG space is Liechtenstein. The government of Liechtenstein shows a strong commitment to sustainability in general and is keen to support fund promoters with regard to their SRI/ESG product offerings. In other words, these initiatives show that Luxembourg and Liechtenstein have identified sustainable investment as one of the megatrends in the investment industry, and they want to participate in the future growth of this part of the investment industry.
These kinds of initiatives are the first step to attract asset managers to focus on sustainable investment strategies, since these managers are looking for fund domiciles with a clear strategy for sustainable development of the country itself. In addition, these domiciles need to be highly transparent in all aspects, including government policies and taxation issues.
From my point of view these two initiatives show there is healthy competition between the different fund hubs in Europe. They might be able to set new standards for fund domiciles, but since we have been lacking serious action until today, it seems both initiatives are more a kind of marketing campaign.
Thank you for this interview, Mr. Weber.