SRI Trend #3: Transition from the Individual Investor to the Institutional Investor.
3 . Movement away from the traditional individual investor towards the Institutional Investor. Individual investors wanting to align their souls with that of ethical corporations/investments have traditionally dominated old-fashioned/traditional SRI. Few institutional asset managers were interested in investing assets in an ethical manner. However, these investors now account for $1.9 trillion in assets out of the total $2.71 trillion under management (data as of 2007) according to socialinvest.org. The $1.9 trillion is up 28% from $1.5 trillion in 2005. The 28% institutional growth is superior to that of the overall SRI asset growth (+18%) and far outstrips the 3% growth of all assets under management (AUM).
Within the institutional investor, an emerging trend is Hedge Funds participating in SRI. Currently, the industry segment is still in an embryonic stage, as these hedge funds are quantitative-based. While they do utilize “ESG” it is used in a quant way via rankings on governance, for example. The alternative is a qualitative method whereby companies’ social responsibility report are read through. According to one asset manager, Trillium Asset Management, “If we could find the connection [between ESG and higher investing returns] extract it, show it, and then demonstrate it, we will change the market.” Trillium oversees about $1Bn for individuals, endowments and nonprofit groups. Some hedge funds are working with traditional institutional investors. Trillium has given hedge fund Auriel Capital Management LLP Auriel’s website on ESG seed money so it could launch an ESG-quant fund next year. Quotient Investors LLC website also started a $10MM ESG quant fund for CALPERS (California Public Employees’ Retirement Systems). Note this isn’t the first time CALPERS (AUM of $217Bn) has engaged in SRI investing. CALPERS has already committed $500MM to SRI via the Negative Screening strategy. But the returns haven’t been satisfactory, hence its use of quant hedge funds. (Source: Wall St Journal).WSJ story
This third trend of Institutional Investing mimics the growing popularity of Shareholder Activism. Of course, this is not a coincidence – you need one to get the other. They’re not all positives from this trend. The individual loses his position as key decision-maker, and the investment process grows more sterile, and, if you will, “corporate” and “institutional” in nature. Further, “SRI’s moral dimension is at least implicitly de-emphasized”, according to Peter Kinder, of KLD Research & Analytics. One of this website’s overarching goals is bringing the individual investor back to the forefront of grass-roots investing.
Going forward, I believe “Screened Pools” such as Exchange Traded Funds (ETFs) may well be the biggest trend of them all. This will be discussed in the next section.