The sustainable investment market has grown significantly during the last ten years. According to the European SRI study 2012, the European sustainable investments market totalled Eur6.8 trillion at the end of 2011, a sixfold increase on the Eur1.0 trillion market at the end of 2005.
A mainstream market
Our survey data highlights the extent to which investing sustainably has become mainstream. Around 50% of surveyed private and institutional investors now take social, ecological and economic considerations into account when making investment decisions.
Multiple factors have contributed to this growth. For large institutional investors and corporations, investing sustainably is driven by a need to maintain a sound reputation and to avoid association with unsuitable companies or sectors. Over 40% of survey respondents believe the sustainable investments market is driven by the need to preserve reputation, making it the second most important driver behind the fact that sustainable investments have performed well (44%). Growth shows no signs of abating – 70% of surveyed institutional investors plan to increase their volume of sustainable investment.
A rating system must be holistic
One of the key findings from our survey is the growing need for a credible ratings system and minimum standard for sustainablefinancial products - eight out of ten survey respondents believe there should be a generally accepted minimum standard for sustainable financial products. Creating such a rating system is clearly problematic given that investors’ definition of sustainability varies significantly. However, according to survey respondents, certain factors are important when rating any type of sustainable investment.
For example, a clear majority of survey respondents (84%) believe a minimum standard for sustainable financial products should be based on internationally recognised standards. Survey respondents judged the UN PRI (Principles for Responsible Investing) and the UK Global Compact’s 10 sustainable principles for companies the two most important sustainability initiatives that should be incorporated into a sustainability rating.
There is also consensus that a credible rating system must be based on ecological, social and economic criteria. However, ecological considerations should be given a greater weighting than social considerations within the rating methodology – 68% of survey respondents stated it is very important to analyse ecological aspects when rating sustainable investments, compared with 56% who stated it is very important to consider social aspects.
Process trumps product when rating sustainability
Another critical finding from the survey is that greater weighting should be placed on an organisation’s business processes rather than the products and services they offer. When asked to rate the significance of various negative sustainable investment screens, survey respondents consistently ranked business processes, such as exploitative child labour, breaches of human rights and corruption, over product screens, such as weapons, pornography, nuclear energy and gambling.
The same holds true for investors pursuing positive investment strategies. ESG reporting and taking note of sustainability hazards was consistently judged more important than the actual products and services corporations offer. Given that the importance of sustainability criteria varies significantly by investor, ratings systems also need to offer a degree of flexibility as to how sustainability criteria should be weighted.
Sophisticated investors need sophisticated rating outputs
Two thirds of survey respondents believe a binding seal of quality or excellence would be useful to categorise sustainable investments. This is advantageous as it enables investors to understand very easily whether an investment product is sustainable or not.
There is also strong appetite for ratings systems to provide more granular information on how an investment product performs through benchmarks against different sustainability criteria – 62% of survey respondents stated that a seal of quality should not only show the overall rating of a financial product but also how it fares in financial, ecological and social subcategories. Investors like investment products to be rated on a scale – 71% stated there should be a grading in the overall rating, be that a numerical rating or a gold, silver or bronze rating. A scaled rating approach would more accurately reflect the sliding scale of sustainable investments. However the disadvantage is that a scaled approach is inherently more complex to understand, especially if a sustainable ratings system is to be layered on top of a scaled financial rating system.
Irrespective of how the rating is displayed, every sustainability expert that we interviewed as part of this research stated that it is absolutely crucial for a sustainable rating system to be transparent about its methodology and weightings. This is the vital for a ratings service to be credible.