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- Sustainability index is down but underlying sentiment is still
- Integration of sustainability criteria in the investment process is seen as a challenge
- Economic benefit and risk management are key motives
- The appeal of active shareholding is growing
Frankfurt, 3 May 2012 – German institutional investors are less enthusiastic about sustainable investments than they were last year. However, they still have a positive attitude toward investments that address environmental, social or ethical aspects in addition to economic factors. This is the conclusion reached by the sentiment
index for sustainable investment compiled by Union
Investment in cooperation with Prof Henry Schäfer of Stuttgart University. On a scale of minus 100 to plus 100, the index was down from plus 22 last year to plus 4 this year.
The index, which was developed by Prof Schäfer, is based on data from a survey into various aspects of sustainable investment. Union Investment conducts the survey each year among institutional investors. This year, 202 institutional investors, such as insurance companies, pension funds, banks, corporations and foundations with total assets under management of more than €2.4 trillion (around €2,440 billion), took part in the study.
"Fluctuations in investors' attitudes are normal and the current level of fluctuation is completely within the normal range", stressed Prof Schäfer. Among others, the following three factors contributed to the fall in the index. Firstly, fewer investors in this year's survey conducted between February and March 2012 stated that they took account of sustainability criteria when making investment decisions. Last year, 64 per cent said they did so, but this year it was just under 50 per cent. Secondly, the weighting given by respondents to sustainable strategies within their overall investment policy fell this year. While 59 per cent of institutional investors revealed that they had given sustainable strategies a high or very high priority compared with other investment criteria in 2011, this percentage had fallen to 42 per cent in the latest survey. Around half of investors apply sustainable aspects to the same degree as other investment criteria. The third factor is a paucity of information, with a fall from 57 per cent to 40 per cent in respondents stating that they feel well informed or very well informed about the issue of sustainability.
Underlying sentiment remains positive
"The latest findings lead us to believe that a degree of uncertainty has crept into the evaluation of sustainable investment strategies. Added to which, many investors have apparently shifted their priorities in the wake of the European sovereign debt crisis, because securing the minimum return they require probably takes precedence over everything else, given the tough market environment", explained Alexander Schindler, the member of Union Investment's Board of Managing Directors responsible for business with institutional clients. "Sustainable investments are not a fair-weather strategy, though. We must continue working on communicating the economic benefit of these approaches – particularly with regard to risk management."
Despite having fallen, the index indicates that the overall, underlying sentiment among investors is stable and positive. "Institutional investors who have been investing sustainably for some time are continuing to do so, but the market is slowing down. However, investors who have been reticent until now, such as company pension schemes, could become strong growth drivers and so provide an additional boost for sustainable investments", said Prof Schäfer.
Great need for strategic advice
In view of the current level of sentiment, Prof Schäfer believes there is a particular need for solutions tailored to customer requirements. "Sustainable investment strategies are very well established among German investors, but many institutional investors still seem unclear about which suit their individual needs and whether they can be implemented in their own investment process", said the professor.
Against this background, Union Investment's Alexander Schindler called for advice about sustainability that focuses much more closely on strategy, pointing out that investors are now faced with much greater complexity given the increasing divergence in the range of sustainable investments. "The question of sustainability now arises in all asset classes, from equities and bonds to real estate", he stated.
Focus on risk management
Despite changes in some areas, this year's survey confirms the core trends in sustainability. Analysis of the economic benefits continues to dominate investors' approach to sustainable investment strategies. 73 per cent of those questioned believe that it is the most important criterion for a sustainable investment, followed by social factors (68 per cent), ethical considerations (67 per cent) and environmental aspects (60 per cent). Last year, improving risk management was one of the main motives for using sustainable investment strategies for 58 per cent of institutional investors, while their number was even higher this year, at 65 per cent.
The same applies to a third trend. Last year, just under 42 per cent of institutional investors said that they were planning to establish or expand their role as an active investor, whereas 47 per cent did so in this year's survey. This means that they are planning to talk directly to companies in order to influence them with regard to environmental and social criteria and the principles of good corporate governance (known as ESG factors).
The United Nations Principles for Responsible Investment (UN PRI) are gaining in importance for sustainable investment by institutional investors. 67 per cent of the institutional investors who are familiar with the UN PRI are examining the standards and requirements set out in the Principles. 21 per cent of them indicated that they had already signed up to the UN PRI, while 12 per cent plan to become signatories in the next twelve months.
Active dialogue with the companies in which they have invested appears to have found its place in institutional investors' repertoire of sustainable management tools. Almost a quarter of investors use this tool for enforcing ESG standards. Just under half of them seek assistance from an external provider. Providers of what are known as engagement services can help investors to manage and enforce sustainability targets and to increase their impact by bundling the interests of investors and pooling voting rights.