Institutional investors continue to show a growing interest in socially responsible investment, (SRI), especially in the US and in Europe. The introduction of SRI criteria in the investment process is becoming more common, often starting with negative screening excluding companies with certain types of business and companies with bad records in terms of social/environmental performance. However, there is also a clear trend that investors are moving their interest – and funds – to products/services aiming to identify companies with good or superior performance in these areas. Best-in-class companies and sustainability pioneers are expected to benefit t from society’s increasing expectations of corporations’ social performance and responsibility. A dimension of business development
and leadership which receives more and more attention.
When SRI-screening also includes an evaluation of how well companies manage to integrate corporate social responsibility issues into strategic business development process, the possibilities to identify ‘sustainability’ winners will grow. SRI-screening then has the potential to become a powerful tool to identify financially sound investments –
not a disturbing restriction on the investment universe, as detractors claim.
Purpose with this report
This report includes a summary of SRI-market developments and key characteristics of best practice. It also briefly presents identified best-practice examples based on MISTRA’s key requirements. The assessment of existing products/services has therefore focused on products/services that specifically consider company strategies, organisation and management systems and also benchmark the companies’ environmental performance.
The report also discusses the potential for MISTRA, and other institutional investors, to improve the quality of SRI-products in the future. By publishing this summary report MISTRA aims to highlight key quality aspects regarding socially responsible investment and constructively contribute to an on-going discussion regarding ways of
improving the quality of SRI products/services in the future.
The assessment was based on a recently updated survey of SRI products/services which includes a total of 142 SRI products from 77 fund managers and a total of 24 analysis/screening organisations. All of these products/services were included in the preliminary assessment which was based on information available on the internet. Most of the organisations included in this assessment are based in Europe or the US.
After this assessment 15 SRI products/fund managers and 8 analysis organisations from Europe and the US remained as ‘best practice’ – candidates. They were contacted and asked to supply information based on a questionnaire/interview guide. This questionnaire was then supplemented with interviews. Organisations that had not responded, after several reminders, were excluded from the list of ‘best-practice’ – candidates
Best Practice Characteristics
The assessment has identified the following key characteristics of SRI products/services representing best-practice:
* Triple-bottom-line-approach Focus should be on sustainable development, which means that environmental, social and economic performance should be evaluated.
* Focus on best-in-class, and pioneers/innovators A combination of investments in companies which represent best-in-class in the ‘bluechip’ business sector, and investments in companies representing pioneers/innovators offers both business and sustainability opportunities.
* Evaluating sustainability opportunities and sustainability risks A screening process aimed at identifying best-in-class companies regarding environmental and social performance should, to a large extent, focus on sustainability opportunities.
* ‘Intelligent’ screening model (combination of qualitative and quantitative analysis) Environmental performance can to some extent be quantified, but should not be limited to compliance testing. The quantitative evaluation also include risks of being too standardized, not suiting all business sectors. A qualitative dimension is necessary in order to identify best-in-class companies.
* Qualified research team Qualified assessments cannot be made without a qualified SRI research team, and it is often difficult to have all resources in-house, covering all business sectors – and different
geographical markets. Leading practitioners are therefore utilising detailed in-house research, but supplemented by basic research undertaken by specialist research groups.
* Openness/transparency In order to gain credibility, and also to influence others, openness and transparency about screening procedures and results are vital. Both in relation to companies screened,
as well as relationships with customers and other stakeholders.
Best practice examples
Five organisations representing best-practice – based on MISTRA’s requirements – are highlighted in the report:
Fund managers with in-house SRI research capability:
* Henderson/NPI, UK
* Storebrand Asset Management, Norway
* Trillium Asset Management, US
SRI- analysis organisations:
* ETHIBEL/Cordius Asset Management, Belgium
* Innovest, US