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Socially conscious investment
As Triodos launches its SRI funds in the UK, we examine what sets apart our funds from the competition.
25-04-2013 | Even if you don’t invest in stock market listed companies directly, the chances are that your pension does. Socially Responsible Investment sets out to have a more progressive approach, but it has come to mean anything from the avoidance of the worst forms of environmental destruction or social injustice to a genuinely conscious approach to investment. As Triodos launches its SRI funds in the UK, we examine what sets apart our funds from the competition.
Socially Responsible Investment (SRI) funds invest in stock-exchange listed companies, balancing the social and environmental impact of the investment with the investor’s financial return. In terms of scale, it dwarfs sustainable banking. In the UK alone, SRI funds’ assets under management were £938.9 billion at the end of 2009, according to the latest figures available. By comparison, the entire ethical banking market in the UK was estimated at just over £20 billion at the end of 2010. Pension funds, and ultimately through them individual investors, hold the lion’s share of these investments.
“There is a big difference in sustainability performance between large companies and it’s possible to identify companies that outperform others, that are setting the agenda in their sector – companies with a very strategic vision of what they can do to ‘green’ the world. It’s our challenge to find them.”
Rosl Veltmeijer, Head of Sustainability Research at Triodos Bank
Each SRI fund has its own definition of what is socially responsible, and there are major variations in these criteria. In the wake of the BP Deepwater Horizon oil spill in 2010, the largest accidental marine oil spill in history, many investors in SRI funds were surprised to find that they held shares in BP. For some, it was their single biggest holding. And these are not one-off exceptions. A review of around 350 SRI funds in 2008 found that BP was the second biggest holding in terms of the money collectively invested in it. Royal Dutch Shell was the biggest holding.
Triodos Investment Management, a subsidiary of Triodos Bank, has managed funds that invest in stock- market listed companies for over 15 years. Its funds are among the most rigorous in the sector in terms of environmental sustainability, social performance and good governance. But the nature of investing in listed companies raises questions in itself. As a sustainable bank, should Triodos be involved with stock-listed multinational companies at all? Few meet all the requirements we demand from the organisations we lend to or have offered direct investment opportunities in, like Cafédirect and Ecotricity. On the other hand these companies are part of the reality of the world, and their scale alone means that even minor improvements in the way they operate can have a significant positive impact, socially and environmentally.
Rosl Veltmeijer, Head of Sustainability Research at Triodos Bank, explains. “Why do we do this? To offer an alternative for people who do want to invest in the stock markets in the most sustainable way possible. The next question is, how can you possibly do this? We do so by making a very deliberate choice to try and find companies that are more responsible than others – ones that are driving the whole sustainability agenda forward. If these companies change, that has a huge impact on wider society.”
Selecting sustainable pioneers
Triodos Bank's sustainability research department is responsible for keeping up to date with the latest thinking on sustainable issues, monitoring legislative and regulatory developments, and ensuring that our selection process is based on the most relevant and reliable information available. In addition, to give us a broader perspective on what are often very complex issues, we’ve set up an advisory panel made up of leading international experts, representing various interests and stakeholder groups. Using wide ranging criteria, the sustainability research department defines the Triodos Sustainable Investment Universe, which lists the companies selected for investment by the Triodos SRI funds. These include sustainable pioneers and companies which are sustainable frontrunners within a sector.
As well as positive selection criteria, minimum standards exclude companies with inherently unsustainable activities – for instance companies deriving direct revenue from weapons, nuclear energy, or oil from tar sands are automatically excluded. The eligible companies are selected on the basis of their sustainability, rather than financial performance with an external fund manager, Delta Lloyd Asset Management, then making the decisions on which companies to invest in from the investment universe. In line with Triodos’ commitment to transparency, the investment universe is published in full online.
“There is a big difference in sustainability performance between large companies and it’s possible to identify companies that outperform others, that are setting the agenda in their sector – companies with a very strategic vision of what they can do to ‘green’ the world. It’s our challenge to find them,” says Veltmeijer.
We’re committed to exerting the strongest possible positive influence on the companies we invest in, through active engagement . In 2011, we had 620 engagement actions involving 368 companies. We’re able to influence and apply pressure on companies in a way that wouldn’t be possible if we didn’t invest in them. And even a small change in the policy or practices of a major company can make a significant global impact.
“We put a lot of effort in engaging with these companies. We don’t do that by power, but by content. Even the front- runners can be a lot more sustainable - there’s a lot they can improve. So we’re constantly trying to push them to go further, to see what is possible,” says Veltmeijer.
Effecting change in the arms industy
Some engagement has a relatively direct impact. For instance, after Triodos liaised with GAP Inc the corporation clarified their policy on fur and specialty leather. Engaging with paper manufacturer Kimberly-Clark led to clarification of the certification schemes they use when sourcing wood fibres, as well as their stance towards the lives of indigenous peoples. Equally significant is Triodos’ ability to influence policy outside of the companies and sectors we invest in. In the case of arms manufacturers and traders Triodos, has been able to effect change in the sector by influencing the banks and asset managers that finance it. As a result of our on-going dialogue with several banks, including providing details of companies involved in the manufacture of such weapons, a number of them have reviewed their policies and are developing or refining blacklists. A few banks immediately sold the disputed investments as a result of our research team’s contact with them.
“Over the last couple of years we’ve witnessed this having a major impact in the way that financial institutions deal with financing arms companies. They’ve now got the information – we’ve made it very transparent and feasible for them to act responsibly,” says Veltmeijer.
This has limited some arms producers’ ability to attract new investors, which in turn can limit their activities. A growing number of arms producers have issued statements that they are not involved in specified controversial arms. Some, including Sweden’s Saab and German company Rheinmetall, have even explicitly stated that they have stopped producing such arms.
Veltmeijer concludes, “People can criticise us for investing on the stock market, but I believe that the way we do it - how transparent we are, our criteria, what the investment universe and portfolio look like and how we engage – all set Triodos apart. Ultimately we’re providing investors with a sustainable and transparent alternative. As an investor you know what we do with your money and can make an informed decision whether this investment philosophy fits you and your beliefs.”
Triodos Investment Management
Triodos Investment Management is a 100% subsidary of Triodos Bank and plays an important role in our mission to help create a more sustainable society. Money invested through our SRI funds is completely separate to the lending Triodos Bank provides with the support of our savers. Our SRI funds offer a way individuals can use our expertise if they choose to invest in stock market listed companies. We haven’t changed the way we lend money, and still lend exclusively to organisations actively delivering social, cultural and environmental benefits with the money entrusted to us by savers.