Two paths
But what is driving the more recent surge of interest in SRI? Our survey of Swedish fund selectors was telling. Firstly, 75% think that SRI considerations improve long-term performance. But almost 70% would be prepared to tolerate a small amount of underperformance if it were caused by following SRI principles. And some 60% of respondents thought that the main driving force behind the move to more SRI was not their clients demanding it, and certainly not government regulation, but the power of public opinion. Companies, whether they are retail brands or pension funds, do not want to be associated with what are seen as unethical practices.
So we cannot divide the world neatly into those who adopt SRI for ethical reasons and those who adopt it for pragmatic reasons. “I think that there is a mix of two completely different things,” says Ulrika Hasselgren, managing director of ISS-Ethix, who advises institutional investors on their SRI strategy. “The struggle is that in one pot we are talking about what is called in some markets SRI, in others ethical investing. There is a whole challenge of definitions.“ Some institutions do not have ethical values but they have external pressure – from their boards or their investors. Others, like the Church of Sweden, have those values. It is difficult for fund managers to understand what all the different investors want. Often investors themselves do not know what they want until they hear what you have to say, then they say ‘Oh yes, I want that’.”
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According to Susanne Bolin Gärtner, head of fund selection at Folksam, the biggest insurance company in Sweden, the situation is changing rapidly.“We used to say that we guide on three parameters: performance, low fees and sustainability,” she says. “That was a couple of years ago. But now we need a hygiene factor, which requires us to go through the holdings of all our funds. The most important thing for me is to have transparency so we can show our end clients the sustainability profile of their portfolios.“
“We work with the fund managers to get them engaged. Whereas before we would say ‘We cannot be responsible for the entire portfolio of all our external funds’, now if a journalist rings up and asks if a particular company is in your portfolio, we have to know. So we work much more closely with external managers.”
You might think that it would be very resource intensive to look through every fund’s holdings – but according to Susanne, Solvency 2 has forced the issue – you have to look at all holdings anyway. The other complexity is that it is not clear what kind of behaviour counts as unacceptable, especially when it comes to suppliers.
“Sometimes it is not black or white,” says Bolin Gärtner. “You might have once excluded a company that is now okay. You work in different time frames. It is dangerous to simplify things. The important thing is to understand the underlying holdings.” Haglund is in the same position.
