Ethical Performance
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Do the super rich see SRI as the way forward?

October 2008

Investment specialists often divide the socially responsible investment market in two – retail and institutional. But a third sector exists  – the high net worth individual (HNWI) market of those with $1million-plus (£557,000) for investment. In service terms it sits somewhere between the two, requiring more tailored offerings than the average individual investor, but ultimately lacking the big clout of institutions.

Until recently, little was known about sustainable investment among this group, which is served mainly by private banks. But two recent reports shed at least some light. A joint study by Capgemini and Merrill Lynch* estimates that globally one in eight HNWIs allocate part of their investment portfolio to environmental sectors including alternative energy, while the first ever study of the European HNWI sustainable investment market by trade body Eurosif** says that sustainable investments form eight per cent of HNWIs’ portfolios, suggesting the HNWI sustainable investment market is worth €540bn, or 20–30 per cent of the institutional SRI market. Around half is in equities.

Eurosif, which gathered the views of more than 80 wealth managers, HNWIs and family offices, says the market in Europe is in ‘an early, high growth phase’, and predicts it will have doubled to over €1,000bn by 2012. KPMG, one of the study’s sponsors (the other is Bank Sarasin), says a ‘seismic shift’ is taking place.

Why now? Part of the explanation is that the range of what’s on offer to investors has increased. Sustainability principles can now be applied to a wide range of investment products, including venture capital, property and private equity – all popular asset classes with HNWIs. Demographic changes are also at work: the number of HNWIs in Europe rose five per cent in 2007 as ‘baby boomers’ retired. Attitudes, too, are changing. Eurosif talks of a ‘generational shift’ in thinking. It could find no ‘typical’ sustainable HNWI investor, but ‘the one common thread was that the younger generation of wealth owners are more inclined to invest sustainably’, with women showing a particularly keen interest.

Most HNWIs prefer a strategy of thematic investing and are less likely to use best-in-class or negative screens. In all, 58 per cent of respondents opted for themed investment, with clean energy, water and climate change most preferred (see bar chart below left). Microfinance is ‘on the cusp of becoming a strategy or asset class’ for HNWIs, Eurosif says.

Ethical considerations may not loom that large in some HNWIs’ minds when making investment decisions. The Capgemini study indicated that around half of HNWIs cited financial returns as their primary reason for green investing. ‘Some sustainable investment players,’ says Eurosif, ‘might claim ... a themed fund needs an additional screening taking into account environmental, social and governance issues.’

Nevertheless, HNWIs will be influential. Less bound by fiduciary duties than investing institutions, they will bring product innovation likely to benefit other investor segments in time. But for this to happen, Eurosif believes wealth managers need more sustainable investment education. One HNWI in her early fifties told EP her ethical concerns had been covered only in a cursory way in fact-finds by the two investment advisers she had visited. ‘They didn’t mention ethical or sustainable investment at all and when I brought it up, the only comment was that the stocks were more volatile.’

*12th Annual world wealth report, www.ml.com

**High net worth individuals and sustainable investment, www.eurosif.org
http://www.eurosif.org/publications/european_sri_transparency_guidelines




Ethical Performance | Global | Investment

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