SRI in Europe: trends and characteristics,and the Maltese i.e. APS Bank Ethical Fund.

The core of this short piece was prepared for Dr Joseph Agius Public Speaking Classes at the University of Malta University at the end of 2014. In it Socially Responsible Investing (SRI) through Malta's APS Bank Ethical Fund is connected to the recent figures of the European Sustainable Investment Forumor Eurosif in 2014. So lots of definitions, numbers, percentages and facts and since I haven't finished Infographics for Dummies they are (still) presented theboring way... But they do show interesting trends and characteristics.

First a warningThe Eurosif report is actually about the half of Europe, 13 countries, mainly Western and Nordic Europe, so the big financial centers and alas Malta is not included. Which is a pity as Malta is ranking 24th European Financial centerin the Global Financial Centres Index. Note that the index focussing on cities as well and not just countries.

Now of course also in Malta SRI products, also referred to as ethical investments, are for sale through international banks and asset managers. But as APS Bank launched the first Maltese Ethical Investment Fixed Income Fundin 2012 which now holds over 11million Euro, it would have been interesting to find out more about other Maltese socially responsible investments.

The European report presented is the European Sustainable Investment Forum on SRI in Europe 2014 is an update of the report from 2012. Which means we can see both two digit growth numbers and trends emerging. To start with a big one: SRI grew 22%, which is more than non SRI-investments grew since 2012.

SRI StrategiesOverall the most used strategy is exclusion of specific companies based on illegitimate products. These are Cluster Munition and Anti-personnel Mines, but not every where in Europe!). Voluntary exclusions related to Cluster Munition and Anti-Personnel Landmines reach about 30% (€5 trillion) of the European investment market. (Eurosif 2014 p.7) In total exclusions amount to €6.8 trillion (idem p.10)

This is followed by Norms Based Investment, that is exclusions based on ethical considerations for Religious or political reasons. Think traditional excluding sectors such as Adult Entertainment, Gambling, Tobacco, Alcohol and Firearms or whole countries suffering from totalitarian repressive regimes. In total Norms Based Screening is applied to €3.6 trillion (idem p.10)

TrendsIn the press release the director of Eurosif Francois Passant states that ''Discussions are shifting from whether SRI makes sense or not from a financial return standpoint, to how its tangible impacts can be measured.

Environment, Social and Governance policies integrationMeasurement as a trend is reflected in Eurosif's first time reporting on the fast growing, +65%, strategy of applying Environmental, Social and Governance criteria abbreviated ESG. Meaning: What does a company do about: protectingthe environment, social conditions is about how does it treat it's workers (safety and health), peoples near production sites and consumers. And is the company governed well and abiding international and national laws? And thusavoiding fines.

ESG is usually referred to as ESG integration and sort of the modern term for what used to be Corporate Social Responsibility. But it is all being measured and reported in usually standardized ways, which makes comparative analyses of companies, sectors and groups possible. With groups I mean sustainability 'leaders', 'followers' and 'laggers'.

Access, systematic and mandatedIn the report applying ESG integration or criteria can mean three things:-1- the investment analists have access to ESG data, so this can be quite passive integration but that would not be very smart....-2- they apply ESG data systematically: which means they are looking for risks and opportunities or;-3- they are obliged by investment mandates to work with ESG criteria in investment decisions. Note that this can mean both exclude (ESG risk) or including ESG opportunities. In the latter category we are usually talking aboutapplying best in class companies that lead the Dow Jones Sustainability Index in their sector or more European: the Vigeo indices.

ESG integration (alone) is estimated to cover (a minimum of) about 11% (€1,9 trillion) of all European professionally managed assets. (Eurosif p.7)Having access to ESG research applies to €5,2 trillion, thus a little over 30%. (Idem p.10)

Back to Malta's APS Bank Ethical FundThe earlier mentioned Maltese APS Bank Ethical Fund works with two strategies: norms based exclusion: in this case of of AGTAF sectors and a critical view of companies with ESG risks and looking into ESG opportunities. As a relatively recent addition to the SRI universe it makes sense that they combine the two strategies. They stress the ESG opportunity factor stating We Invest in Companies that Excel In: Renewable energy, water treatment, waste management emplyee relations, environmentally responsible, good corporate governance. This sounds as a best in class investment strategy where by funds invest in sustainability leaders.

Though I am hardly an expert of ESG criteria, I did notice one social criterion in the 2012 brochure list of social issues reviewed that struck me because I had not come across it before. The APS Ethical Fund monitors companies policies on obesity.

After some research I did find this is a topical issue for food and beverage companies. In the Netherlands the Access to Nutrition Index surveys the industry the way they address poor nutrition and related diseases and rates them. But apart form sustainable leaders Danone, Unilver and Nestléquite quite low.

With the Maltese overweight and obesity challenge in mind, the addition of companies policy on obesity is interesting. Obesity causes health problems, disability and even chronic diseases such as diabetes which can cause kidney and heart problems etc. One could consider APS Ethical bank criterion animpact investment choice. As it directly aims at prevention of health problems. Malta has one of the European Unions highest rankings with the UKand Latvia for both being overweight, often a pre-phase for, and obesity. Thus excluding companies that do not have policies on obesity is an interesting criterion. Since the Fund invests worldwide, effects in Malta will be limited, but setting this standard is exceptional and in my opinion applaudable.

Impact InvestingAs I am an ardent impact investing missionary, I am also very pleased that the Eurosif report, also for the first time, has 10 pages about Impact investing.Actually with a +132% growth it is the fastest growing SRI variety. But also still the smallest with (now) a mere € 20billion. This has a lot to do with the self reporting character of the survey by (only) institutional investors and assetmanagers. Also the definition of Impact investing has an effect: Eurosif definesImpact investors as seeking to generate measurable benefits and actively measure these. This is quite a traditional perspective. It only measures investing in:

Social integration, promoting access to affordable housing, health, finance, education, personal care or employability; or

Sustainability-related projects in the field of production and access to, for instance, renewable energy, food, water, sustainable agriculture. This category is heavily focused on developing markets.

Definition dilemmaThrough this definition and with this focus Impact Investment comprises for 55% of micro-finance, followed by community investment and social business. For Eurosif impact investing is a mere SRI strategy and not sustainable investing 2.0 as I propagate. Which means it embodies not just traditional private equity impact investments, but any kind of sustainable investment, backed up by Key Performance Indicators (KPI's) and focuses on peoples basic needs and natural resources or impact catalysts such as information technology providing for more or better basic needs fulfillment and more efficient natural resources use.

Drs Alcanne Houtzaager MA, Impact Investing Nieuws (bi-weekly Dutch blog)

In English Past, Present and Future of Impact investing, A contemporary history surfing the world wide web in Dutch perspective http://impactinvestingnews.blogspot.nl/2015/01/past-present-and-future.html

SOURCES

Global Financial Centres Index: http://en.wikipedia.org/wiki/Global_Financial_Centres_Index Malta is 76th and unfortunately dropped 9 places in rank as it lost 33 points in the rating.

APS Bank Malta: http://www.apsbank.com.mt/en/ethicalfundAPS Bank is a Maltese bank established since 1910, with majority shareholdingheld by the Archdiocese of Malta and Gozo.

The full EUROSIF 2014 report: http://bit.ly/1r2ftQQ (pfd, 72 pag.)Reference: http://www.eurosif.org/our-work/research/sri/european-sri-study-2014/

The press release in English: http://www.eurosif.org/wp-content/uploads/2014/09/Press-Release-European-SRI-Study-2014-English-version.pdf

The Access to Nutrition Index (ATNI): is founded on the premise that Food& Beverage manufacturers can make a strong contribution to addressing poor nutrition and related diseases. By assessing and ranking the world’s largest manufacturers on their nutrition-related commitments, practices and performance globally, ATNI aims to encourage companies to:

• Increase consumer access to nutritious and affordable foods and beverages through actions related to product formulation, pricing and distribution; and

• Responsibly exercise their influence on consumer choice and behavior through actions in areas such as marketing, labeling and promoting healthy diets and active lifestyles.

http://www.accesstonutrition.org/objectives-0

APS Ethical fund 2012 brochure http://www.apsbank.com.mt/file.aspx?f=2582014 version http://www.apsbank.com.mt/file.aspx?f=1989

Obesity in Malta: http://ec.europa.eu/eurostat/statistics-explained/index.php/Overweight_and_obesity_-_BMI_statistics