The State of SRI in Europe – Past, Present and Future

by Dimitrios Mavridis,
Communication Executive of the European Sustainable Investment Forum [Eurosif]

The Inherently Heterogeneous Case of SRI in Europe

In the U.S., the notion of socially responsible investment took off in the 70s on the back of several socio-political movements. By contrast in Europe, despite the first European SRI Fund being technically launched in 1965 in Sweden (Aktie Ansvar Myrberg) and a couple of other moves in the 80s (especially in the UK) and the 90s (continental Europe), the European SRI Industry really started to develop in the early 2000s. The 1992 Earth Summit and a rising environmental conscience (Exxon-Valdez, Amoco-Cadiz, etc.) had contributed to the emergence of a new breed of European investors. In 2002, Eurosif, the European Sustainable and Responsible Investment Forum, was established followed by the launch, in 2006, of the United Nations-backed Principles for Responsible Investments (PRI).

Today, SRI in Europe is still a young segment of the asset management industry and hence highly innovative. On top of this, SRI in Europe has not developed in a uniform way. The history, culture, beliefs and motivations in the different European markets have had a large impact on what local players will call SRI. At this stage, there is therefore no consensus on a unified definition of SRI within Europe, whether that definition focuses on processes used, sought outcomes or depth and quality of the processes applied. However, recent developments in the market signal an increasing sophistication of players as they combine the different SRI approaches[1] available.

Trends of SRI Strategies Followed by Investors in Europe

The Eurosif bi-annual market review covers seven sustainable and responsible investment strategies: Sustainability-themed, Best-in-class, Norms-based, Exclusions, Engagement and Voting, ESG Integration and, since 2011, Impact Investing. All seven Sustainable and Responsible Investment strategies have grown between 2011 and 2013 and have done so, at a faster rate than the broad European asset management market. During the period, the overall European asset management industry has grown by an estimated 22.1%[2] while SRI strategies had individual growth rates ranging from 22.6%[3] (Sustainability themed) to 91%[4] (Exclusions) and 132%[5] (Impact investing, a smaller and younger SRI approach).

Amongst SRI strategies followed by investors in Europe, Exclusions has gone ‘mainstream’ as a strategy with, by far, more assets covered than any other strategy, and with the most consistent usage across Europe. This is largely due to the deployment of a negative screening policy with one or a few criteria on a wide range of assets, an approach that Eurosif describes as an “overlay” strategy. Exclusions cover about 41 percent (€7 Trillion) of European total professionally managed assets (€17 Trillion). Even when considering Exclusions not related to Cluster Munition and Anti-Personnel Landmines (CM & APL), the strategy covers about 23 percent (€4 Trillion) of the overall European investment market. Voluntary Exclusions related to CM & APL reach about 30 percent (€5 Trillion) of the European investment market.

Other strategies like Norms-based Screening or Engagement and Voting also exhibit impressive growth rates (70 percent and 86 percent, respectively) and assets but are not deployed as consistently as Exclusions across countries. The progress of Engagement and voting in non-traditional markets such as Italy (+193 percent growth over 2011-2013), Germany (+48%), Belgium (+94%), Scandinavia and Switzerland signals changes in attitudes toward stewardship amongst European investors. Norms-based investing, i.e. screening a universe of investments according to their compliance with international standards and norms, has also become less of a “Scandinavian phenomenon,” with other players adopting similar approaches for instance in France or in the Netherlands.

Focusing exclusively on investments made by institutional investors and asset managers (thus excluding public and philanthropic funding), European Impact investing has grown to an estimated €20 Billion market. It has shown a 132 percent growth rate between 2011 and 2013.

ESG integration is one of the fastest growing strategies. Through ESG integration, an investor will incorporate ESG criteria when constructing an investment portfolio. Although there are different ways to practice ESG Integration, it is important that processes are systematic and formalized. Today, Eurosif estimates that about 11 percent (€2 Trillion) of all European professionally managed assets are managed according to such practices. However, several players are entering this space and less structured or systematic ESG Integration processes, for instance whereby an SRI analysis team would make its findings available to mainstream portfolio managers, are estimated to cover another €3 Trillion. If one thinks that making ESG/SRI analysis available to mainstream portfolio management teams is often a first step towards more formal practices, it is therefore encouraging to see that all forms of integration have grown by 65 percent since 2011.

The Future of the European SRI Market

As mentioned previously, no consensus on a unified definition of SRI exists within Europe. Various markets have different mixes when it comes to SRI approaches. For instance, active ownership is more prevalent in the UK or in the Netherlands compared to other markets, and Best-in-Class is still the dominating strategy in France. However, we believe that some strategies, such as in particular Norms-based or Engagement and Voting, have the potential to become fully pan-European. There seems to be a wider adoption of these strategies, as “overlays”, across markets, albeit with different degrees of maturity.

The most prevalent perceived market driver for the near future remains institutional demand. Institutional investors continue to drive the market with an even higher market share than in 2011. However, there are several national and European legislative developments that will also support future growth. For instance, the current revision of the European Shareholder Rights Directive[6] has the potential to foster engagement and voting practices whereas the ongoing Capital Markets Union initiative could contribute to build an investment environment conducive to greater responsible investment practices if it was to take sustainability criteria into consideration; something Eurosif has been advocating for recently.

About Eurosif

Eurosif (www.eurosif.org ) is the leading pan-European Sustainable and Responsible Investment (SRI) membership organization whose mission is to promote sustainability through European financial markets. Eurosif works as a partnership of Europe-based national Sustainable Investment Forums (SIFs) with the direct support of over 65 Member Affiliate organizations drawn from the sustainable investment industry value chain. These Member Affiliates include institutional investors, asset managers, financial services, index providers and ESG research and analysis firms totaling over €8 trillion assets. Eurosif’s indirect European network spans across over 500 Europe-based organizations. Eurosif is also a founding member of the Global Sustainable Investment Alliance, the alliance of the largest SIFs around the world. The main activities of Eurosif are public policy, research and creating platforms for nurturing sustainable investing best practices.

Article by Dimitrios Mavridis, who came on board the European Sustainable Investment Forum in February 2014 in charge of communications and media.

Prior to this he has worked with the European Federalists, holding functions in communications and membership building. He has also completed a traineeship in the European Commission where he experienced first-hand policy making. Dimitrios has lived in the U.K. while working for City University of London from which he has also obtained a Master degree in International Politics. He is a Greek national, fluent in English and conversational in French.

Article Notes:

[1] For all seven approaches/ strategies to SRI and their definitions, please see: p. 9 – 10,European SRI Study 2014

[2] EFAMA, Asset Management in Europe, June 2014

[3] European SRI Study 2014

[4] ibid

[5] ibid

[6] You can find more information on the progress of the legislative file on the European Parliament dedicated Webpage .