Demand for responsible investment strategies has increased steadily in recent years, and we expect to see further growth in 2018. However, a number of factors continue to generate unhelpful scepticism, frustrating the acceptance of Responsible Investment (RI) into the mainstream. These include confusion around common RI terminology, as well as concerns about the robustness of associated performance data and a lack of appropriate analytical tools. If a breakthrough is to be achieved, the industry as a whole needs to up its game and provide more structured, transparent offerings.

The rationale for RI is clear: well-run or improving businesses that look to the future are more likely to deliver higher, more sustainable investment returns over the long term. It is often asserted that RI or the integration of Environmental, Social and Governance (ESG) factors into investment can deliver better performance, and that this is no longer a point of debate - and by inference whichever approach is being proposed is validated. But the huge variety of approaches applied under the RI banner has created a climate of uncertainty and scepticism about the performance benefits that is, if anything, growing.

A rethink on what RI is and entails is long overdue, both to ensure that the needs of the emerging generation of responsible investors can be met, and to address the wider scepticism that exists about the performance contribution of RI strategies.

That said, while many investors remain to be convinced that integrating RI into their portfolios will not hurt performance, demand for RI strategies continues to grow. The 2016 European study of RI by Eurosif highlighted that assets invested across a wider variety of RI strategies grew by 11%, from €9.9 trillion¹ to €11 trillion², between 2013 and 2015. That growth has since continued, and is expected to do so further, and be seen on both the demand and supply side with, for example, 30% expansion anticipated in the green, social and sustainability bond market³.

The growing focus on sustainability is also helping to drive growth, with businesses and investors alike increasingly looking to demonstrate awareness of their ability to contribute to delivery of the UN Sustainable Development Goals. That is leading to changes in capital allocation to generate social benefits and sustainable positive outcomes.

In a recent HSBC survey, 59% of companies reported investment plans to make their business more operationally sustainable, while 73% of investors planned to increase social impact-related investments.⁴ Even with a sceptic in the White House, climate change also remains high on the agenda with the HSBC survey highlighting that 68% of investors planned to increase their climaterelated or low-carbon investments. That focus is also reflected in the policy arena. Following the adoption in 2015 (the same year as the Paris climate agreement) of Article 173 of the French Law on Energy Transition for Green Growth, French investors are required to disclose how they factor both ESG and climate factors into their investment policies. This is stimulating debate as to whether equivalent principles should be adopted across the EU.

Overall, we expect to see an increasing focus on RI and outcome-based RI. However, a challenge remains when it comes to ESG integration and the continuing scepticism as to whether it enhances the risk and performance characteristics of portfolios.

Demand for responsible investment is at an all-time high, with more than €11 trillion invested in sustainable and responsible investment strategies, and we expect to see further growth in 2018

Rethinking responsibility

We see RI as an all-encompassing term, combining ESG and sustainability research, screening, integration, stewardship (engagement), proxy voting, portfolio profiling and client reporting.

Under this broad umbrella, ESG research done properly provides a window into the quality, leadership, culture and operational standards of business practices. With competing ESG research and ratings services producing significantly different, even contradictory, results, the industry still has much work to do to move into the mainstream. This is an example of where the need for enhanced analytics has become ever more important.

Sustainability research, however, is very different and the trend seen in some quarters in re-labeling ESG as sustainability has exacerbated existing scepticism. A recent survey on sustainable investing found that 75% of investors (rising to 86% among millennials) are interested in sustainable investment; however, a majority (53%) of these also believe that investing sustainably requires a financial trade-off.⁵

We strongly believe that investors need not sacrifice performance to achieve a sustainable positive outcome. It has to be done properly though. Sustainability research needs to focus on the commercialisation and delivery of outputs, products and services that address (through their outcomes and impacts) significant social and economic needs to generate returns.

Investors urgently need enhanced tools that can deliver analytics which are evidence-based and avoid assumptions; tools that are not only meaningful in an investment context but are also comparable.

A recent report found that 75% of investors were interested in sustainable investment, but a majority believe it requires a financial trade-off.

Critical year

2018 could be a watershed year for responsible investment. The next 12 months need to see the industry respond to the scepticism that exists, be transparent about the focus of what is being done (e.g. materiality versus advocacy), and show that its research is fit for purpose (e.g. for outcomes versus hygiene) and what it contributes to enhancing the investment outcomes (e.g. in respect of risk and return).

The gauntlet has been thrown down. If the industry responds effectively, responsible investing could finally enter the mainstream.

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¹ Eurosif: European SRI Study 2014 - European Data Table.
² Eurosif: European SRI Study 2016 - European Data Table.
³ According to Credit Agricole.
⁴ HSBC "Surveying corporate issuer and investor attitudes to sustainable finance" (2017).
⁵ Morgan Stanley Institute for Sustainable Investing: Sustainable Signals - New Data from the Individual Investor, 7 August 2017.