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Fact or fiction: SI is a niche form of investing

Fact or fiction: SI is a niche form of investing

11-06-2018 | Insight

Sustainability investing has sometimes been considered niche – so the sheer size of it may come as a surprise. While some areas are indeed still niche, such as impact or thematic investing, the SI world is now a multi-trillion dollar industry that is becoming mainstream as more people commit to it every day.

  • Guido Moret
    Guido
    Moret
    Active Ownership Specialist
  • Masja Zandbergen
    Masja
    Zandbergen
    Head of ESG integration

Speed read

  • UNPRI signatories manage USD 70 trillion in assets in 50 countries
  • ESG is now routinely integrated and applied to multiple sectors
  • Paris Agreement and other regulation is changing the landscape

The practice of investing sustainably certainly began as a niche investment concept in the 1990s when Robeco was among the first investors to start taking it seriously. At the time, the focus was on what was then (and sometimes still is) called Socially Responsible Investing and mostly revolved around excluding undesirable industries such as tobacco or weapons manufacture from portfolios. Actual investments tended to be highly specific, in niche industries such as organic food or the then nascent renewable energy business, and only in equities.

Two decades later, sustainability investing has massively broadened its horizons to focus on environmental, social and governance (ESG) factors that are increasingly integrated into the investment process across all asset classes. In Europe, more investors are now engaged in it than those that are not, with 52.6% of all assets managed under SRI at the end of 2016, according to the Global Sustainable Investment Alliance.1

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Money invested in types of SI strategy globally, 2014-2016.
Source: Global Sustainable Investment Alliance Review 2016

Indeed, so widespread is sustainability investing in Europe that many asset managers are now playing catch-up, according to asset management analytics firm Cerulli Associates. “The stampede to address ESG concerns has left European fund managers running faster to stand still. Asset management companies have raised their game, and so have the companies in which funds invest,” the company said in its September 2017 newsletter.2

One way to gauge the sheer scale of SI globally is to look at figures from the United Nations Principles for Responsible Investment, which works to encourage sustainability investing using six guiding principles. It now has 1,750 members; Robeco and RobecoSAM were among the original signatories. Operating in 50 countries, UNPRI signatories collectively manage about USD 70 trillion in investments, equivalent to three times the GDP of the United States.3

Source: UNPRI

Other international groups have emerged to promote sustainability investing. The International Corporate Governance Network (ICGN) is dedicated to improving the G in ESG, and now has over 600 members managing assets of USD 26 trillion.4 In the US, the Forum for Sustainable and Responsible Investment (USSIF) reports that assets which are managed sustainably have rocketed from under USD 1 trillion in 1995 to above USD 8.7 trillion at the end of 2016, accounting for 20% of the entire investment market.5

Integrated ESG

For Robeco, sustainability investing has been mainstream for many years. ESG is routinely integrated into the investment processes of the entire fundamental equity, fixed income and quantitative ranges of strategies. Of the EUR 152 billion in assets under management at September 2017, some EUR 91 billion is explicitly managed using integrated ESG, or 60% of the operating business. For other funds, other forms of ESG integration is implicit, since sustainability factors are always taken into account, although they may focus more on regionally or industrially specific issues.

Another way to gauge how widespread sustainability is used in the investment industry can be seen in Requests for Proposals (RfPs) – detailed forms that prospects send to asset managers asking about their products. Questions regarding ESG and sustainability now appear in 90% or more of all the RfPs received by Robeco, and the level of detail needed is getting longer. For example, potential investors now want to know the level to which sustainability is integrated and how it is done, rather than simply whether an asset manager adheres to the UN PRI.

With that, the ability of an asset manager to offer sustainability funds has become more important in recent years. Evestment, a global specialist in institutional investment data and analytics, has expanded its ESG data collection efforts with asset managers to satisfy the rising demand from investors for greater transparency into the managers’ sustainability investing practices, reporting “a 150% increase in ESG screening activity worldwide in the last 18 months."6

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Regulations and risk

Finally, politics and regulation is putting sustainability higher up the political agenda. The European Commission in January set out the recommendations of its High-Level Expert Group on Sustainable Finance to “deliver a roadmap for a greener and cleaner economy” across the EU.7

Most notably on the regulatory front is the Paris Agreement, which commits nations to limiting global warming to below 2 degrees Celsius and ideally to a maximum of 1.5 degrees above pre-industrial levels. This is having a profound effect on how the world creates energy, shifting away from fossil fuels and into renewables such as wind farms or solar power.

Much of this investment remains in thematic or impact funds, but it has become the fastest-growing area of sustainability investing, as nations take their commitments to combating climate change more seriously. Combined with the surge in use of integrating ESG in traditional equity or fixed income funds, sustainability is gradually moving to niche to mainstream to become the norm, and is likely to grow further.

1 Global Sustainable Investment Alliance 2016 Review
2 Cerulli Associates, the Cerulli Edge, European Monthly Product Trends, September 2017
3 For more information, see the United Nations PRI
4 For more details about the ICGN, see
5 US Forum for Sustainable and Responsible Investment, ‘Report on US Sustainable, Responsible and Impact Investing Trends’, 2016
6 Fundfire, ‘Evestment expands how managers report ESG data, October 2017
7 European Commission, ‘Final report of the High-Level Expert Group on Sustainable Finance’, January 2018

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