Responsible investment assets rise to $1 trillion

After years of tepid growth, assets managed using responsible investment criteria jumped to $1 trillion as of Dec. 31, 2013, a 68% increase from the last RI survey conducted in 2011.

The Responsible Investment Association publishes its responsible investment trends report every two years. In 2011, RI assets topped $600 billion, a modest increase from $517 billion in 2009. The latest version of the trends report was released this morning.

So why such significant growth in the past two years? Mostly, it’s due to large pension funds and their institutional managers using RI guidelines more frequently, growing the sector by $288 billion to $821 billion, and comprising more than 80% of total RI assets under management.

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However, there was also growth in retail RI mutual funds, which increased 52% to $6.6 billion in AUM from $4.36 billion two years ago. Total retail RI assets, which include retail venture capital funds as well as mutual funds, rose 30% to $17.5 billion.

”We’ve seen tremendous growth of responsible investment in Canada: the RI industry has surpassed $1 trillion, reflecting 68% in growth in just two years,” said RIA chief executive officer Deb Abbey. “Although this is a huge number, we’re actually slightly outpaced by the U.S. RI industry, which grew by 76% over the same period. European RI assets increased by 55% over the same period, so we’re seeing similar robust growth that’s trending globally.”

Abbey notes that although most growth is from the institutional side, there’s significant growth in retail as well, leading to speculation that a long-awaited trickle-down effect, where the institutional side leads retail in discussions about responsible investing, may be coming to fruition.

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But she notes those discussions are going both ways. “The retail mutual funds are doing the lion’s share of the corporate engagement work in Canada, focusing on proxy voting, for instance. Those discussions are just starting to happen on the institutional side. A lot of them have become signatories to the United Nations-backed Principles for Responsible Investment, and they are now exploring how to fully integrate environment, social and governance [ESG] issues into their investment management processes.”

How investors implement RI

The most popular RI strategy is engagement/shareholder action, followed ESG integration, norms-based screening and negative/exclusionary screening. Positive or best-in-class screening was the least popular RI strategy.

For respondents with a formal policy on corporate engagement and shareholder action, the most common engagement issues were executive compensation, human rights, greenhouse gas emissions, supply chain management, and bribery and corruption.

For companies with a negative screening strategy, the most commonly excluded products are weapons and tobacco, followed by nuclear, gambling, pornography, alcohol and animal welfare.

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Looking forward, survey participants are largely optimistic about the RI industry’s outlook, with 59% of survey respondents expecting either moderate or high levels of growth over the next two years.

Asset managers were also asked about new RI products, with demand expressed for low carbon or fossil fuel free products. In fact, several asset managers who took part in the survey said they are considering launching this type of product.

Despite the encouraging numbers and generally positive tone coming from the RI industry, Abbey says there is room for improvement. “For instance, some of Canada’s largest pension funds who practice RI strategies still invest in producers of tobacco, weapons, and other products that responsible investors typically avoid. So there is still much work to be done.”