Socially responsible investing is gaining greater acceptance among mutual fund portfolio managers, as more managers worldwide are finding environmental, social and corporate governance (ESG) issues important and relevant to mainstream investment analysis. In fact, within the next five years, they expect these issues to become even more critical factors affecting performance.
Currently, 65% of managers worldwide believe globalization and 62% think corporate governance are the two ESG issues that are most relevant to typical investment analysis, according to a Mercer Investment Consulting survey of 157 investment management firms worldwide, with assets of more than $20 trillion.
Globalization has placed a great deal of pressure on resources and has also increased environmental and social concerns, as they now play an important role in the global economy. Further, corporate governance has been in the headlines in recent years, causing shareholders to focus on board accountability and independence, executive compensation, financial disclosure and internal controls.
"The environmental and social effects of globalization are being experienced by governments, local communities and businesses across all regions, as pressures and resources grow," said Jane Ambachtsheer, global head of Mercer's socially responsible investment business. "Similarly, corporate scandals have hit the headlines in almost all regions, so it is not surprising that these two issues are viewed as the most important responsible investment factors by investment managers."
Aside from corporate governance and globalization, 41% of managers worldwide believe that terrorism is also material to investment performance, both now and over the next five years.
Managers in the U.S. seemed most concerned with terrorism and how it will affect the world's investment climate, with 43% of them citing terrorism as a factor they currently consider when selecting a stock or investment sector. That rises to 49% by 2011.
Outside the U.S., however, a considerably smaller proportion of managers, 24%, believe terrorism is currently a key factor in investment decisions, as many of them have already decided to avoid investments in companies doing business with countries that sponsor terrorism. That drops to 15% in five years.
By 2011, environmental management will become a major investment factor for portfolio managers around the world, rising from 21% currently pointing to this as a concern to 42% saying they would do so by 2011. When considering a company's environmental management, portfolio managers look for efficient use of resources, such as energy, materials and water. If environmental management becomes more of a standard practice, portfolio managers said, it could reduce the environmental impact of business operations while generating financial value.
In fact, in the U.S., the biggest gain among the ESG factors in the next five years is in use of and access to clean water, climate change and environmental management. By 2011, U.S. portfolio managers said, corporate governance and environmental management will be their two top socially responsible investing issues, primarily because these issues will have increasing impact on a portfolio's high gains.
The United Nations has revealed that one third of the world lives in water-stressed conditions, making it an issue of concern for governments, communities and companies. The management of water can reduce input costs, minimize business disruption risk, improve regulatory compliance and address stakeholder concerns. Australia, the United Kingdom and Canada also believe that people will soon have a different outlook on the accessibility to clean water.
As a result of the current investment climate, 13% of investment managers polled believe there will be an increase in client demand for ESG considerations in investment analysis in 2006, rising to 38% in the next three years, as they foresee more clients asking them to apply ESG considerations to their portfolio selections.
"Demand for socially responsible investment products is likely to depend on the rate at which environmental, social and corporate governance ESG analysis is incorporated into mainstream investment processes," said Tim Gardener, global head of Mercer Investment Consulting. "If managers move rapidly to integrate environmental, social and corporate governance factors into their investment processes because of client pressures or otherwise, it is logical that the demand for SRI specialist products may decrease."
Managers were also asked whether the issues they considered most relevant to performance at the individual asset level would impact capital markets in 2006 and over the next five years. "Survey results indicate that the ESG issues considered most relevant to performance at the individual assets level, corporate governance and globalization, are not expected to be the primary drivers of overall capital markets, neither now nor in the future," the report said.
Alternatively, interest rates and corporate profits are expected to have the greatest effects. Oil prices are also expected to impact every region's capital markets.
The participants in the study included investment managers with strategies focused on different regions of the world, including Australia, Canada, Europe, Singapore, the U.K. and the U.S. Well-known firms, including Lehman Brothers Asset Management, Lord Abbet, Morgan Stanley Investment Management and Goldman Sachs Asset Management, participated in the survey.
Recognizing the increasing importance of socially responsible investing, Mercer created a SRI business unit in 2004 to work with investment management firms around the world to implement socially responsible investing programs, and offer a range of services - from policy development to manager selection and monitoring.
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