Socially responsible investing (SRI) is a current “hot button” topic. You hear a lot about new developments in the SRI industry but less often about how the mainstream investment management community views these emerging issues.

Mercer surveyed investment mangers on SRI

In late 2004, we conducted our annual Fearless Forecast survey of over 190 investment managers worldwide. As part of that survey we asked regional managers for their views on whether certain SRI practices would become a common component of mainstream investment processes in the near and long-term. Managers in Asia, Australia, Canada, Pan-Europe, and the US were surveyed.

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What we asked

Our survey asked managers the following question:

“In what time frame, if any, do you believe the following investment practices will become a common component of mainstream investment processes and strategies?”

1. Active ownership (shareholder engagement/activism, proxy voting);


2. Positive or negative screening for social and/or environmental factors; and


3. The integration of social and/or environmental corporate performance indicators.

The complete survey findings were released in January 2005, but this article focuses on the SRI component. Findings show that the investment managers surveyed worldwide, on average, are becoming more convinced that the adoption of SRI practices and strategies will become commonplace:

• almost 80% predicted that active ownership will be a mainstream practice within 5 years (89% in 10 years)
  
  
• almost 40% predict that positive or negative screening will be mainstream within 5 years (65% in 10 years)
  
  
• 37% predict that the incorporation of social and/or environmental (SE) corporate performance indictors will become mainstream within 5 years (73% in 10 years)
  

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Regional SRI views vary widely

On a regional level, the managers’ responses varied widely. US managers were the least convinced, with over 60% of them believing that screening and the integration of social and/or environmental factors will never become a mainstream investment practice. The Asian and Australian managers, on the other hand, seem to be the most convinced, with over 85% of them predicting that all three SRI-related practices will become mainstream within 10 years. European managers predict the most short-term activity in relation to the integration of social and/or environmental criteria, and positive and negative screening.

The tables below provide further insight into regional views.

Active ownership (shareholder engagement/activism, proxy voting)

We can see that active ownership is far ahead of the other two factors with 89% of the managers surveyed believing it will become a mainstream practice within 10 years.  Managers surveyed in all regions except the US believe strongly that this trend will continue and pervade mainstream practices.

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Positive or negative screening for social and/or environmental factors

A smaller percentage of managers (65%) feel that positive or negative screening for social and/or environment factors will become mainstream within 10 years, but this prediction is still noteworthy. It is likely that these figures capture a view that more managers will explicitly include or exclude stocks based on an investor’s mission (such as, no tobacco), as well as for business case reasons (such as, high litigation risk).

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The integration of social and/or environmental corporate performance indicators

Almost three-quarters (73%) of the managers surveyed predicted that the integration of social and/or environmental corporate performance indicators would become mainstream within 10 years.  It is clear from the above table that the US managers stray from the global trend with over 60% of them forecasting that social and/or environment performance indicators will never be a mainstream investment practice.

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Reconciling views: managers, Mercer, the market

The world of SRI is evolving quickly, and relates to an ever broadening range of topics. Recently, we’ve seen the launch of the Enhanced Analytics Initiative (EAI), continued debates on the materiality of environmental, social and corporate governance (ESG) issues, and launches of new SRI indices and investment products.

It would seem that a growing number of critical drivers are now in place which may result in mainstream investors becoming more involved in some form of socially responsible investing. These drivers include:

• government support in many countries,
  
  
• a growing perception that ESG issues can have a material impact on corporate performance, and
  
  
• an increasing continuum of implementation options that investors can pursue.
  

At Mercer, we have formalized our global approach to SRI.  Alongside having a dedicated SRI consulting capability, our manager research will now include assessing the approaches that investment managers are taking towards these issues within their traditional or mainstream investment practices.

This development reflects the fact that many of our clients are seeking to become more responsible, active, and transparent in how they manage their assets, and are seeking help in understanding their options and implementing their chosen approach.

The SRI trend has been percolating for some time, but time frames have been less clear in terms of these practices becoming mainstream. Our survey of manager expectations suggests that managers believe it to be set on a mainstream trajectory – perhaps more strongly than many in the industry would have assumed.