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Sustainable Investments Come of Age

Cyril Demaria, Geneva, 29 October 2008

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European HNWs are applying an equivalent of a realpolitik attitude to their sustainable development portfolio: they no longer expect a premium from being good, but a typical market rate return.

Bank Sarasin and KPMG have sponsored a Eurosif study about the goals and behaviours of European high net worth individuals as regard to sustainable investments. The results show that HNWs have been ramping up the amounts committed and plan to further increase them.

Quoting the Merrill Lynch/Capgemini 2007 Financial Advisor Survey, it estimates the overall allocation of European HNWs to sustainable investments to 8 per cent. Combined with the results of the Merrill Lynch/Capgemini 2008 World Wealth Report, it expects that the proportion will reach 12 per cent and €1 trillion invested by 2012. Still, only 27 per cent of respondents invest 10 per cent or more of their assets in sustainable investments.

Criteria Indigestion
European HNWs are applying an equivalent of a realpolitik attitude to their sustainable development portfolio: they no longer expect a premium from being good, but a typical market rate return. The fact that sustainable investment applies to almost any kind of product (following the same trend as faith investments) encouraged HNWs in the perspective that sustainable development criteria are in fact a different level of screening. 26 per cent of respondents see sustainable development as an asset class in itself and 23 per cent as an investment style.

European HNWs thus apply negative screening (excluding sectors), positive screening (selecting bests of class companies), thematic investing techniques and/or community investing filters (even though this may have an impact on the expected returns).

This mosaic still makes it difficult to create a critical mass on the market to radically change behaviors. Even if European HNWs are increasingly aligning their investment strategies with their word, companies are on the other hand still in the "wait and see" attitude.

Signalling Before Turning?
In that respect, and despite the optimistic perspective of the study, sustainable development is at a crossroad. Stating explicitly that a generational change at the helm of fortunes management is linking capital growth and preservation, as well as out performance, it concludes that sustainable development will deliver in the mid to long-term "which typically corresponds with HNW investment timeframe and wealth management horizons".

The lack of harmonised investment methods makes it premature to announce that the appetite of European HNWs for the techniques is an early signal of future institutional allocations. In fact, an analysis of the Domini Social 400 Index, which tracks stocks selected according to sustainable development criteria, actually shows a weak performance over five and ten years against the S&P 500 (respectively 5.17 and 4.25 per cent; and 2,9 and 3,06 per cent). There is still some way to go before convincing institutions in that respect.

* Eurosif, High Net Worth Individuals & Sustainable Investments, 31 pages, 2008

 

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