Asset managers believe these developments are part of a long-term trend rather than being one-off events. The recent Mercer IC’s 2005 Global Fearless Forecast survey shows that 89 per cent of asset managers believe active ownership will be a mainstream practice by pension funds within 10 years, 73 per cent thought the same of the incorporation of social and/environmental corporate performance indicators and 65 per cent highlighted positive or negative screening.

Jane Ambachtsheer, Mercer IC’s global head of socially responsible investment (SRI), expects steady growth in the use of SRI, particularly in the engagement of companies. This will not be restricted to equities as Ms Ambachtsheer highlights the recent launch of an SRI fund of hedge funds.

The European Social Investment Forum (Eurosif) estimates that SRI by European institutional investors has risen from €336bn in 2003 to around €500bn.

Matt Christensen of Eurosif, however, says there will be greater differentiation within SRI in the future. While some aspects will become part of the mainstream, other parts will remain niche. “Climate change or labour rights, for example, may be integrated into the research process for investment managers.”

This development will be driven by greater awareness and belief in the long-term benefits of SRI. “A growing number of trustees realise that SRI can deliver long-term value for investment management,” says Mr Christensen.

Clare Brook, director of SRI at Morley Fund Management, says pension fund trustees are likely to come under greater pressure from scheme members to incorporate SRI. “Most beneficiaries would want sustainable investment to be used and for their pension fund to engage companies. This will accelerate as awareness grows.

“One example is Unison in the UK which has allocated the management of its equities to SRI.” This is partly because Unison is a pension fund for trade unions and therefore it wants to reflect its members’ interests.

In 1999, the UK’s Universities Superannuation Scheme (USS) started integrating responsible investment across its research process. Raj Thamotheram, senior adviser for responsible investment at the USS, says that to gain the long-term benefit from responsible investment, it needs to be integrated in all its research rather than just a small part of the fund.

“By focusing on a small number of key areas, and working with other large investors, we are able to exert more influence than by disinvesting from sectors, companies or countries,” says Mr Thamotheram. “We see significant benefits in investment potential in encouraging good practice standards.”

Ethical research

As part of the growth of SRI, Mr Thamotheram points to the Enhanced Analytics Initiative, in which asset managers and pension funds have allocated at least 5 per cent of their brokerage commission to sell side researchers who analyse extra financial issues. These issues include corporate governance, and environmental and social areas such as human rights, employment standards, and reputational risk.

Noel Grant, senior investment consultant at Watson Wyatt, says the number of specific SRI pension fund mandates have been limited by the general quality of investment managers in this area.

Grant: ‘lack of quality SRI managers’

“In any area, we look for investment managers who can add value and out-performance in the future,” says Mr Grant. “There is a lack of top quality investment managers in SRI at the moment, with some significant exceptions. The other difficulty is in analysing the performance of SRI managers as they tend to have a small and mid-cap bias. This means they generally do well when small and mid caps are strong.”

Nevertheless, Mr Grant has seen progress and believes there is more to come. “Eight years ago there was virtually no institutional interest in SRI so it has developed. Pension funds are likely to focus on it more in the future although this partly depends on the quality of the investment managers.

“SRI will be integrated into mainstream managers’ research processes. As issues like climate change become more important so they will more greatly affect share price movements. SRI will become another factor that fund managers have to consider. Its importance will vary over time, from market to market and sector to sector.”

French push

Where continental European pension funds have used SRI, it has tended initially to be for a small proportion to test its effectiveness. The €17bn French Pensions Reserve Fund, Fonds de Reserve Pour les Retraites (FRR), is to issue tenders for SRI mandates shortly. Nada Villermain-Lecolier, investment director in charge of developing and implementing the fund’s SRI strategy, says the objective is to select several managers with “well defined and solid SRI processes capable of implementing FRR’s strategy”. In May, FRR announced it had selected BFinance and two international SRI specialists to help design the call for tender and analyse its outcomes.

Ms Villermain-Lecolier says that the long-term objective of the FRR enables it to implement SRI mandates. “FRR has a mandate to manage reserves until 2020 at least so we need to take a long-term perspective. Over the next 15 years SRI will have more impact on investment performance because environmental and social issues will become more important.”

She says the French Pensions Reserve fund can allocate to SRI because so far there is no evidence that SRI either adds value to or damages investment performance. “The data is too young to draw any conclusions. Where it has no negative effect on performance, we want investment managers to invest in companies that do not damage the environment and society.”

Roland van den Brink, managing director investments of Pensioenfonds Metalektro (PME), the €14bn Dutch metalworkers’ pension fund, believes use of SRI by pension funds will increase, but only slowly. He argues this will be through natural growth and will not be driven by regulatory changes or pressure from scheme members.

PME has invested 1 per cent of its assets in SRI through a separate mandate, which was awarded in early 2003. Also in the Netherlands, ABP, the €160bn pension fund for government and education employees, has allocated €190m to the Loyalis Global Sustainability fund while the PGGM pension fund has allocated 8 per cent of its assets to SRI investment.

Martin van den Akker, spokesman for PGGM, says: “SRI will become a mainstream investment. One of the three pillars of our SRI policy is engagement, which has proved to be quite effective through the constant dialogue with the management of companies.

“A lot of influence is to be expected from the active role investment managers play in shareholder’s meetings all over the world. Engagement and corporate governance will form a powerful instrument in the hands of institutions and companies that strive for
sustainability.”

Investors wishing to combine investment returns with contributions to a good cause are starting to explore the opportunities offered by the microfinance sector.

The UN declaration of 2005 as International Year of Microcredit has drawn further attention to an industry that provides a wide range of financial services to microenterprises across the world.

According to Giles Keating, global head of research at Credit Suisse, investments in microfinance can offer low correlation with mainstream indices while satisfying investors’ need for including socially responsible investments in their portfolios.

Mr Keating, who recently presented the results of research on microfinance conducted by his firm, says: “This is a market that already has quite significant scale but it’s growing rapidly”. Today there are around 500m microentrepreneurs in the world with average microcredit of around $500 (€388).

“Out of world population of 6.5bn some 4bn are not really able to gain from globalisation yet. One of the reasons for that is that conventional finance is designed to operate on a relative large scale because all the various layers of cost that get built in.”

“The idea behind microfinance is that even a fund as tiny as $100 can help a microentrepreneur set up a small clothing business and from the investors perspective there is a clear connection between the money they put into the investment and how it is going to be used,” Mr Keating adds.

Currently there are 250-500 commercially viable microfinance institutions offering affordable microcredit loans to 50m microentrepreneurs. According to the Credit Suisse report, repayment behaviour among these individuals is superior to that of US credit card holders.

Although interest in this type of investor is mostly coming from private investors, institutions are now more willing to include that asset class in their portfolios.

A good example of this is the Dutch pension fund ABP which recently announced an investment of €5m in microcredits. This will support more than 14,000 enterprises by an average loan of €350m.

For those wanting to follow ABP’s lead there are several microfinance investment funds in the market like the Responsibility Global Microfinance fund – an initiative by a group of Swiss banks including Credit Suisse that mainly invests in debt of microfinance institutions – or the Dexia Micro-Credit fund.

There have also been some developments regarding the securitisation of microcredit loans to create investment products that can attract mainstream investors. This added to the expected growth in the sector could result in microfinance becoming a standard asset class within the broad SRI universe.

Paula Garrido

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