Ethical investing in US bucks the downturn

12th November 2010

According to the 2010 edition of the Social Investment Forum Foundation's (SIFF) report on 'Socially Responsible Investing (SRI) Trends in the United States', over the three years to end-2009 sustainable and socially responsible investing assets increased more than 13% from $2.71 trillion to $3.07 trillion. And that was during a period over which broad market indices such as the S&P 500 declined and the wider universe of professionally managed assets increased less than 1%.

The SRI trends being seen in the US echo developments in Europe, with a recent study by European Sustainable Investment Forum (Eurosif), a pan-European association focused on Sustainable and Responsible Investment (SRI), revealing that the ethical investment market in the region now totals Euro5 trillion in terms of assets under management.

That compares to Euro 2.7 trillion in 2008, representing a spectacular growth of 87%. A Mindful Money article on the Eurosif report can be read here.  

Upward trends

My-Linh Ngo, associate director of SRI research at Henderson Global Investors, says the overriding headline from both the SIFF and Eurosif reports is the continued, if not accelerated, growth in SRI assets under management.

"Not only is this occurring faster than the wider market, it has also been happening during the current global economic crisis.  Secondary trends are the increasing presence of institutional investors in the SRI market, as well as growth in advocacy/engagement and integration strategies."

SIFF's report says the pool of assets engaged in SRI has grown more rapidly than the overall investment universe due to such factors as net inflows into existing SRI products, the development of new SRI products, and the adoption of SRI strategies by managers and institutions not previously involved in the field. 

More broadly, the study notes that since 2005, SRI assets in the US have increased more than 34% while the broader universe of professionally managed assets has increased only 3%.

Nearly one out of every eight dollars under professional management in the United States today – 12.2% of the $25.2 trillion in total assets under management is involved in some strategy of socially responsible and sustainable investing.

Promising numbers

The study, which can be downloaded in full here, estimates that the total value of assets managed under policies that explicitly incorporate environmental, social and governance (ESG) criteria into investment analysis and portfolio construction are valued at $2.51 trillion.

Of these ESG assets, $691.9 billion were identified within specific investment vehicles managed by money managers, while at least $2.03 trillion were identified as owned or administered by institutional investors.  

Of the institutional ESG assets, $206.3 billion were managed through investment vehicles captured in research on money managers. The assets and numbers of fund vehicles tracked as incorporating ESG criteria rose 90% since the last SIF study conducted in 2007-from 260 to 493-and their assets increased 182% from $202 billion to $569 billion.

Social Investment Forum chief executive officer Lisa Woll says: "Socially responsible and sustainable investing emerged from the recent financial crisis doing better than the overall market in terms of holding onto assets and attracting new investments.  

"What is significant about this strong growth is that it encompasses both retail investors, including SRI mutual funds, and institutional investors, who hold the majority of SRI investments."

Robust expansion

Woll adds: "We have also seen robust expansion of the strategies of shareholder advocacy and community investing.  All of these developments show that the key principles of socially responsible and sustainable investing are being more widely embraced.  

"All signs point to more investors looking for investments that support good governance and greater transparency and disclosure on ESG issues."  

Report co-author Joshua Humphreys, based at the Center for Social Philanthropy, Tellus Institute, Boston, says: "SRI is a ray of hope across an otherwise dreary investment landscape.  

"Increasing numbers of investors are moving their money and demanding more ‘responsible returns' from their investments, by taking environmental, social and governance issues into account."

Humphreys adds: "Investment consultants and asset managers are rising to this growing demand from individuals and institutions, and we see impressive growth in new sustainable investment vehicles and strategies across asset classes, from ETFs to alternative investments in venture capital, ‘double-bottom-line' private equity and responsible property funds that promote environmental sustainability and positive community impact."  

Rising to the challenge

My-Linh at Henderson Global echoes Humphreys' view that consultants and asset managers are rising to the challenge, something that is evident in Europe too. She says: It is certainly true that other key stakeholders in the investment value chain are starting to play a greater role in considering SRI concepts.  

"For instance, the investment consultants, in their advisory roles to institutional investors, have become more engaged in the past few years, helping to raise awareness and educate clients about different SRI strategies and products, and dispelling common myths about SRI investing. 

"Clients in Europe have broadly been more receptive than in other regions to this message."

In considering how the US and Europe/UK are faring in comparison based on the latest findings by Eurosif and SIFF, My-Linh firstly stresses that different countries and regions have adopted slightly different approaches to SRI.  

Yet for My-Linh it is also clear that a key theme emerging in SRI on both sides of the pond is that, thanks to the increased presence of institutional investors, advocacy/engagement and integration strategies have become popular globally. 

She also notes that across regions, interest is growing in asset classes other than equities. 

She adds: "Whilst environmental thematic investing is further ahead in Europe, I see the US as being more advanced on community/social impact investing.  Overall the SRI market is the most fluid and dynamic it has ever been, which makes it a very exciting and interesting time for all those involved in the industry," she says.

A very ethical week

The SIFF has been released during the UK  National Ethical Investment Week. This Mindful Money article has more information about its aims and objectives.

Among other reports published to coincide with NEIW, there was a YouGov survey showing green, ethical investment in the UK is continuing to grow strongly, with more than half of all British adults with investments surveyed saying they want to "make money and make a difference". A Mindful Money article on the YouGov survey can be viewed here.

Other key findings from the SIFF report include:

Institutional investors:  With $2.3 trillion in assets involved
in SRI strategies, institutional investors dominate the SRI universe documented in this report.  Of this overall universe of institutional assets engaged in SRI strategies:  $2.03 trillion incorporate ESG factors into investment analysis and portfolio selection; $858.8 billion is controlled by institutions that file or co-file shareholder resolutions on ESG issues; and $586.2 billion were identified as involved in multiple strategies of ESG incorporation, shareholder advocacy or community investing.

Alternative investment funds:  The  report identifies 177 alternative investment vehicles that incorporated ESG criteria with $37.8 billion in total assets.  

Alternative investment vehicles include hedge funds, social venture capital and double- and triple-bottom-line private equity funds and responsible property funds, typically organized as unregistered limited partnerships or limited liability companies and available only to accredited institutional and high-net-worth investors.  

The number of alternative investment vehicles incorporating ESG criteria increased 285% since 2007, faster than any other segment of ESG vehicles, while their assets increased 613%.  

Mutual funds:  The largest share of funds that incorporate ESG factors are mutual funds, with $316.1 billion in total assets invested in 250 different funds.  Of these ESG mutual funds, 27-with $176.9 billion in assets-underlay annuity products.

Shareholder advocacy:  A wide array of investors now files or co-files shareholder resolutions at US companies on ESG issues, and hundreds of these proposals come to votes each year.  

From 2008 through 2010, more than 200 institutions- including public funds, labour funds, religious investors and foundations-and investment management firms filed or co-filed proposals.  These institutions and money managers collectively controlled $1.5 trillion in assets at the end of 2009.

Community investing:  Assets in community investing institutions rose more than 60% from $25.0 billion in 2007 to $41.7 billion at the start of 2010, reflecting healthy growth in all four categories of community investing institutions that the Social Investment Forum Foundation has tracked since 1999: community development banks, community development credit unions, community development loan funds and community development venture capital funds.

Exchange-traded funds:  Twenty-six ETFs with $4.0 billion in total assets were identified as incorporating ESG criteria.  Although ETFs accounted for only 1 % of the total assets of all ESG investment vehicles, their assets have grown 225% since 2007, the fastest of all registered investment vehicles.

Separate account vehicles:  Among separate account managers, 232 distinctive separate-account vehicles or strategies, with $122.4 billion in assets, incorporated ESG factors into investment analysis.

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