Financial industry overview
As a whole, the UK’s fund industry continues to grow significantly with assets growing faster in the UK than globally. The industry continues to be highly international, with around 40% of the £5.5 trillion of AuM coming from overseas clients. Pension schemes are still the largest client source, although new savers automatically enrolled into defined contributions schemes are going to influence the relation between asset managers and the pension market significantly. While savers are being offered more opportunity to invest as they choose, asset managers may also be deemed to be gaining new responsibilities. Such changes will give asset managers the opportunity to diversify their offer to provide new generations of retirees with new suitable solutions. Recently introduced “pension freedoms” in the DC area, coinciding with the wider introduction of automatic enrolment, may lead to a transformation in retirement saving, as pensioners leave their assets invested throughout their retirement. The Investment Association forecasts this may lead to increased demand for outcome-focused funds, income generation and more diversified multi-asset portfolios.
Characteristics of the SRI market
The UK SRI market is well-diversified and flourishing. Its greatest strength probably lies in its fund management community, clustered in London and Edinburgh. This group has close working relationships with networks of significantly sized pension funds, with active charity and faith investors, and with committed financial advisers serving the retail market. These market structures are supported by world-leading support services in investment consulting, metrics and investment banking. This value chain means that the UK is home to SRI providers in all key asset classes, usually in both retail and institutional forms. There are clear signs indicating that SRI is becoming mainstream in fund management in the UK. This is evidenced by the changing nature of fund managers’ engagement in terms of the background and seniority of individuals and the strength of public commitment. In some cases, firms have explicitly told UKSIF that SRI support which was previously “philanthropic” is now being judged by conventional commercial criteria. This is a welcome sign of growing scale and maturity. The process of mainstreaming has seen an extension in the reach of SRI approaches, notably the launch of the UK’s first daily priced social bond fund and the impending launch of a multi-asset class product utilising skills developed in a long-standing equity fund.
A feature of the past two years in the UK fund management space has been increased activism by institutional asset-owners. At least 3 initiatives should be noted: the Pension Fund Roundtable, an informal group of large funds, outlined what they wanted in important respects from fund managers; the Aiming for A coalition, despite origins in fund management, has built its profile on support from around 100 named asset owners and successfully filed shareholder resolutions on transparency at major oil and mining companies; and the Association of Member Nominated Trustees (AMNT) drafted best practice voting instructions across “E” and “S” as well as “G”. This is reflected in the continued growth in Engagement and Voting figures which have increased from €1.7 billion to over €2.5 billion at year-end 2015, reflecting growth across the overarching majority of Asset Managers.
In addition to the data in this report, other sources suggest strong growth in UK fund management SRI. Retail data from EIRIS and the Investment Association both suggest growth in the retail area of more than 10% p.a. The data from the IA is monthly; despite recent data revisions which cloud the picture, sales of the funds they define as “ethical” have been running at well above historic levels.
Beyond fund management, banks operating in the UK generally have a high-level of stated commitment to SRI and to disclosure on their activities and impact. However the reputation of banking generally has not recovered from the damage stemming from the financial crisis. Although less frequent, there are still new scandals and court cases continue. UKSIF worries that the level of disclosure in retail banking, as opposed to investment banking, may be too low. The past few years have seen several so called “challenger” banks emerge. These banks have a retail focus but little in the way of explicit ethical commitment. There remains, however, a small number of explicitly ethical banks and they are beginning to widen their remit. In terms of financial inclusion, the UK remains well-positioned. The proportion of UK citizens without a bank account remains low compared to the US and continental Europe, and the Government took action in 2014 on bank charges for simple bank accounts to protect this position.
Although the UK impact and social investment markets are still small compared to the whole investment field, they are growing steadily and continue to be a hub for innovation. In a recent report, Big Society Capital has estimated the value of social investment at the end of 2015 to be £1.5 billion while the wider impact investment market is believed to be worth around £73 billion. The report highlights the diverse mix of social investment products now available.
The UK SRI market is broadly based. Mention should be made of the large number of NGOs and think tanks which are based or active in the UK. Bodies such as WWF and Carbon Tracker have made important contributions which affect multiple sectors. In fund management, the IIGCC, CDP, PRI and AODP are UK based. A significant number of single-issue campaigns are also active in the country. Our subjective view is that the agenda and intellectual content used by the SRI community increasingly reflects work done by bodies which sit outside the financial services sector. It seems likely that SRI issues will receive more attention following the recent change in government. In particular the new Prime Minister, Theresa May, has made comments suggesting changes in the approach to executive pay and wider corporate governance which may resonate with the drivers of the growth in engagement and voting reported above. Her attitude to climate change is not yet clear, but her government has endorsed the fifth carbon budget in line with expert recommendations.
The UK Stewardship Code, representing a series of commitments made by asset owners, continues to develop. So far, it has been signed by 196 Asset Managers, 88 Asset Owners and 14 Service Providers.
The UK fund management sector may be about to see significant regulatory change as a result of work flagged in the 2014 European SRI report. In the spring of 2016, The Pensions Regulator (“TPR”) endorsed a legal interpretation of fiduciary duty proposed by the Law Commission, namely that “where [trustees] think ESG issues are financially significant you should take these into account”. TPR also said that “where appropriate” trustees should seek to influence managers’ stewardship policies, and “where practicable” trustees may wish to agree specific voting criteria with managers. These opinions may come to represent charters for both ESG investment and more active Stewardship by owners. There have been some similar developments in thinking on charity investment, but they are driven by a lawyer’s opinion rather than a regulatory intervention. The TPR’s thinking will most immediately support momentum in trust-based, institutional pensions. If their approach is echoed by the Financial Conduct Authority then it should support subsequent growth in the smaller, but rapidly growing personal pensions market, and it may stimulate activity in direct retail markets. All fund markets may get some stimulus from the greater availability of fund ratings, with increases in the number and reach of ratings agencies in the past 12 months, but sector opinion is divided as to the real worth of this development.
In banking, the outlook is for “more of the same” as banks seek to persuade society that they have changed and are making a worthwhile contribution to the quality of life.
The implications and impact of the recent EU referendum decision to ‘leave’ are as yet unclear. It is unlikely to affect the development of domestic UK SRI thought, but to the extent that UK-domiciled services are supported by sales into the EU, uncertainty has been created. UKSIF is confident that the UK will continue to remain a world leader in sustainable finance in the future and we look forward to continuing to work with Eurosif and our members to ensure that this is the case.
SRI Market and strategy overview
The most impressive growth that we observe across SRI strategies in the UK is on Exclusions which grew by almost 300% in the last two years across all Asset Managers who participated in our questionnaire.
As forecast in the previous Study, we notice considerable growth in Impact Investing as well but it concerned mainly 3 players (Impax Asset Management, Columbia Threadneedle and WHEB Asset Management). We expect further growth in this area, with interest from individual investors spurred by the UK’s 30% social investment tax relief.
After registering growth of less than 12% from 2011 to 2013, norms-based screening registers an important decrease this year to €7.8 billion. This is mainly due to managers now classifying their process as integration rather than norms-based. UKSIF views this as evidence of the evolution of thought and approach in the UK market. Given that our subjective view is that integration has grown steadily in the UK, the small decline in the figures below almost certainly reflects the current lively debate about further developing definitions and interpretation of ESG criteria.