Socially responsible investments (SRI) account for only a tiny sliver of the European fund industry, but they are selling proportionally faster than funds overall, according to Strategic Insight data.

European SRI funds have gathered net inflows at roughly three times the rate of the industry as a whole, relative to assets, says Daniel Enskat, global head of consulting at Strategic Insight.

Investors have poured some $10bn (€6.7bn) into European-domiciled SRI funds year-to-date, although such funds represent only $146bn in assets under management. By comparison, investors have shifted $148bn into European funds overall, but the industry as a whole has about $7 trillion in assets under management.

Firms have launched 100 new SRI share classes and funds in Europe this year, by Strategic Insight’s count. Those funds have seen about $1bn in net inflows, Mr Enskat says.

The European SRI industry is also growing faster than the US marketplace. Net inflows into US SRI funds, across all categories, amount to little more than zero, Mr Enskat says.

Still, SRI as a general concept continues to make more sense for institutional investors than for individuals, he says. Institutional investors can pick and choose where to invest, but a mutual fund must satisfy investors who have potentially wide-ranging preferences when it comes to tobacco, climate and other SRI concerns.

To that end, firms have been launching SRI funds with more finely tuned definitions in recent years.

“The methodology and the definitions are becoming more segmented,” Mr Enskat says. “If you have a more clearly defined climate change product, then investors can more associate with that and say: ‘Climate change, I get it.’ SRI doesn’t mean much to people. That has always been the crux of it.”

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A small but growing proportion of retail investors are becoming interested in SRI and other themed funds, agrees Amin Rajan, CEO of Create Research. But the future success of such funds may depend on their performance.

“The track record of these funds is not long enough to deliver a convincing story as yet,” Mr Rajan says. “If and when the record gets better, SRI could become very appealing to theme investors.” He adds: “It’s worth emphasising that performance is the product: the theme is only the icing on the cake for those who value it.”

A growing body of research shows certain environmental, social and corporate governance factors can have a positive effect on portfolio returns, according to a new report by human resources consulting firm Mercer.

Of 16 recent academic studies, 10 show a positive relationship between such factors and companies’ financial performance, while four show a neutral relationship and two show a neutral-to-negative relationship, Mercer finds.

“The report’s really about trying to move the debate from ‘SRI or RI always underperforms’ to ‘it can provide competitive performance or outperformance,'” says Craig Metrick, US head of responsible investment within Mercer’s investment consulting practice. “Let’s focus the debate on how to do it right.”

20 November 2009, for the full article, click here.
By Marc Hogan