Equities lose out to bonds for Europe’s sustainable investors

Bonds are the favoured asset class at 53 per cent among European sustainable and responsible investors with equities dropping to 33 per cent, according to a Eurosif SRI report.

And, asset consultant Towers Watson is bullish about the sector’s ability to produce better outcomes financially and socially with the global head of investment content, Roger Urwin, predicting that the profile of sustainable investing “will grow steadily”.

Research by Eurosif (European Sustainable Investment Forum) in its 2010 report shows the European SRI market grew from €2.7 trillion ($3.6 trillion) in 2007 to €5 trillion ($6.7 trillion) at the end of 2009: a growth of about 87 per cent over two years or a compound annual growth rate of 37 per cent.

While the Eurosif study said the “real growth story” was in the SRI bond (+33 per cent) and monetary asset (+114 per cent) classes, it cautioned against over-enthusiastic interpretation of this “spectacular growth” against mainstream equivalents.

“It is not known,” the report said, “to what degree some of this growth is due to the transfer of assets from existing funds, versus the accumulation of new assets”.

Towers Watson, in its paper “Investing long term – a sustainable investing roadmap”, notes that this style of investing is “an iterative process involving monitoring framework” with feedback being crucial.

Sustainable investment allocations must make “periodic adjustments to the investment arrangement”, Roger Urwin says, and the influence of feedback “is particularly important as the decision need greater justification in pure financial terms”.

“The most critical function of monitoring,” he says, “is that funds assess the performance potential of an effective long-term strategy, irrespective of any possible shorter-term underperformance.”

Institutional investors are driving the European SRI market, representing 92 per cent of the total EU SRI market, and the Eurosif report notes that high net-worth individuals are also a growing influence on the market.

“The HNWI market can act as an early signal of investing appetite for future asset allocation of more mainstream institutions,” the report says.

Retails investors are increasingly aware of SRI, the report says, “but they are still stymied by sales channels that often have not been tailored to properly market and sell SRI vehicles”.

Both the Eurosif and the Towers Watson reports concur that sustainable investing can have good results for investors. “There are credible arguments,” says Roger Urwin, “to support the tenet that sustainable investing will produce both better investment outcomes and better societal outcomes.”