The amount of responsible investments in Europe and the US has grown significantly the past two years and strategies are getting still more sophisticated. It began more than 250 years ago with religiously inspired exclusions of companies that could be associated with alcohol, tobacco, weapons etc. This first generation approach is still the most dominating strategy according to new surveys from Eurosif, US SIF and PRI. However, in Europe engagement and voting have grown more than 30 percent the last two years.
The most recent strategy having emerged, Impact Investing, has been tripled since 2013, typically with a focus on one or more of the 17 UN Sustainable Development Goals. And strategies for integrating environmental, social and corporate governance issues (ESG) into financial analysis and decisions are getting more and more advanced.
It is difficult to summarize the application of the many existing strategies and concepts. However, here is a brief overview of the latest development with regard to the seven dominating archetypes of responsible investments approaches. Each can be applied individually or together with others in a growing number of possible combinations.
Exclusions or negative screening
The exclusion or negative screening strategy, avoiding investments in controversial business activities such as tobacco, alcohol, weapons, is the dominating strategy in Denmark as well as in Europe as a whole and the United States. The approach has increased by 48 percent in Europe the last two years and now has amounted to 10 trillion Euro.
The highest prevalence for this approach can be found in Switzerland, Germany, UK and Sweden. One of the main factors of the significant growth is divestment of coal and fossil fuel companies. In the US, the dominating exclusion strategy relates to countries that can be related to repressive regimes or terror. Exclusions of tobacco related companies has dropped from a third place to a ninth place in the United States.
In Europe one of the most common exclusions is linked to controversial weapons like cluster munitions and anti-personal landmines. However, as these investments are illegal, they are not part of the new Eurosif survey.
In Europe, the second most dominating strategy is the norm-based screening, with an increase of 40 percent the last two years. The strategy aims to identify companies that are violating international conventions/norms and/or principles related to ESG. Often the screening is related to UN Global Compact, UN Guiding Principles on Business and Human Rights or OECD Guidelines for Multinational Enterprises.
Normally, the companies identified either will be excluded from the investment portfolios or influenced through active engagement and voting, to solve the problems. As the latter approach traditionally has been especially popular in Sweden, Norway, Finland and Denmark, it is often called the Nordic or Scandinavian model. However, during the past two years, the norm-based strategies have also been popular in France, Switzerland, Netherlands and Italy.
Engagement and voting
The third most dominating European strategy is active ownership, practiced either through engagement dialogue, voting at the general assembly’s or a combination. Many empirical studies have shown a significant positive financial effect of successful engagement that has been able to reduce the risk-premium of the involved equities. The fiduciary duty of being active and responsible owners and investors is seen as a more and more important driver as well. Not least due to the coming so-called Shareholders Rights Directive from the EU Commission.
In Denmark, more than 75 percent of the 50 largest institutional investors has some kind of set-up for engagement, which has led to the fact that Denmark has the fourth largest engagement-volume in Europe.
In the US, a wide array of institutional investors and money managers file or co-file shareholder resolutions at US companies’ General Assemblies on ESG issues, and hundreds of these proposals come to votes each year. Voting by distance, proxy voting, is also becoming more and more popular in Europe.
Source: Eurosif European SRI Study 2016
Impact investing and sustainability themed investments
With a growth the past two years of no less than 385 percent Impact Investing is the fastest growing category of responsible investment in Europe. The volume is still relatively modest and there are disagreements on which investments to include in the category. However, it is roughly defined as investing to achieve a positive social or environmental impact together with an acceptable financial return.
The strategy is similar to sustainability themed investments, which has been the second most growing category of responsible investment in Europe. The growth rate of 146 percent the last two years is first and foremost due to so-called green bonds and sustainable investments in infrastructure, real estate etc. mostly in France, the Netherlands, Switzerland and the UK.
Integration and best in class
The last two archetypes of responsible investment, Best in class and Integration, are according to Eurosif, virtually non-existent in Denmark and many other European countries. However, in France it is very popular and has grown by 40 percent in Europe the last two years. The Best in class approach is about focusing on companies that have the best ESG scores in a particular sector. It can be done through a special index or fund, or it can be integrated in the ordinary financial analysis.
Integration, the seventh and final strategy of responsible investment covers a range of methods to integrate ESG factors into traditional financial analysis. A newly released report from the PRI describes a wide range of highly sophisticated models categorized as fundamentals, quantitative, smart beta and passive.