November Insight – Sustainable investment: the success in statistics
This article, written by Valentina Neri, originally appeared in Italian on Lifegate.it
Sustainable investment is outpacing the industry average, with double digit growth over the past two years. That's enough to show how much Europe is starting to appreciate sustainable investments that profit both the investors and the planet.
For too long, sustainable and responsible investment has been considered as niche, or naïve. But now things are changing. This much is clear from Eurosif’s latest report, the 2016 SRI Study.
For the Study, Eurosif interviewed 278 players in the field from all over Europe, who together manage more than €15 000 billion. The results speak for themselves: the market for sustainable and responsible investment in Europe has grown by more than the industry total. "It is a particularly promising time at the European level. This much is demonstrated by the policies and laws adopted by Junker, as well as the sustainable investment consultations on non-financial reporting and so on. In our Study, we have of course emphasised the strong relationship between the policy and the growth of sustainable investment, to make it clear to policy makers just how influential they can be", said Flavia Micilotta, Eurosif’s Executive Director.
What's even more interesting is that SRI is no longer reserved for institutional investors (large institutions such as banks and insurance companies). In fact, the number of retail investors (i.e. individual investors) went from 3.4 in 2013 to 22%, "a symbol of some investors’ willingness to understand the importance of ESG criteria for their investments" Flavia Micilotta told LifeGate.
Sustainable investment, it begins with exclusions
Not all sustainable investments are alike; they can come under seven different strategies as identified by Eurosif. All seven have seen steady growth over the past two years, but there are significant differences. As the “oldest” strategy, exclusions take the lion's share of the European SRI market. Choosing this strategy means excluding all potential companies from their investment universe that operate in sectors that conflict with the investor’s ideals (tobacco, weapons, pornography, gambling and so on...). In 2015, exclusions broke through the wall of €10 trillion of capital invested in Europe, an increase of 48 % compared to 2013. "It is no surprise - says Flavia Micilotta - considering the proliferation of investors (especially pension funds) that have chosen to divest their capital from coal and oil". This market is worth more than 2.5 trillion in Switzerland alone, followed by the United Kingdom with just under 2 trillion (an encouraging +99 % in just two years).
Renewable and clean energy worth the investment
Over the past two years, there has been a very promising growth of so-called sustainability-themed investments. The strategy refers to all funds that are invested directly in areas related to sustainability: energy efficiency, renewable energy, low-impact transport, waste management and so on. It is a much more selective and complex approach than exclusions and this explains why it’s still much smaller. However the growth is constant and sustained: in 2009, in Europe sustainability-themed investments accounted for €25 billion, then in 2013, it came to just under €59 billion and in 2015 experienced a real boom, reaching €145 billion (+ 146 %). The leading countries are France (with more than €43 billion) and the Netherlands (over €37 billion).
Impact investing making headway
Impact investing experienced the fastest growth. With its policy of sustainable investment, companies, organisations and funds take on two objectives: a financial return, as with any conventional investment, and a positive impact, that is both concrete and measurable, for society and the environment. Although still relatively new, this strategy is experiencing a veritable explosion. Europe went from €8.75 billion in 2011 to €20 billion in 2013 before going over €98 billion in 2015, with an impressive +385 % in just two years. Between them, the Netherlands and Denmark almost have the monopoly on impact investments (more than €40 billion and €30 billion respectively), but in the coming years, we can expect interesting figures from other European countries.
The rise of the Green Bond
Preparing the 2016 SRI Study, Eurosif couldn’t ignore the green bond trend. Green bonds are issued to finance projects related to the fight against climate change. In 2015, the world’s first green bonds were issued for $40 billion, a figure that will probably be doubled in the course of this year, since new issues had already passed $44 billion by August 9.
Because of the sector’s meteoric rise, Eurosif emphasises the strong need for clarity. Investors are actually demanding more and more accurate information about the projects in which the proceeds of the bonds are invested, so as to figure out who can really be trusted. "It is important to follow definitions and rules if you want the green bonds to represent a real breakthrough and to ensure fair play. In an industry where the definitions aren’t always set, this is not easy. Non-partisan, the European Commission may decide to intervene to make things clearer, but they might perhaps prefer to leave it up to the market. There are definitely pros and cons to both of these options" said Flavia Micilotta.
To date, there are two main self-regulatory initiatives, the Green Bond Principles and the Climate Bonds Initiative, and both operate on a voluntary basis. Meanwhile an increasing number of companies rely on an external auditor to ensure that projects financed by green bonds are truly "green."