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High Net Worth Individuals & Sustainable Investment I 2008 EUROSIF MEMBER AFFILIATES ABP Amnesty International Association of the Luxembourg Fund Industry Asset4 AXA Investment Managers Bank Sarasin BNP
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High Net Worth Individuals & Sustainable Investment I 2008 EUROSIF MEMBER AFFILIATES ABP Amnesty International Association of the Luxembourg Fund Industry Asset4 AXA Investment Managers Bank Sarasin BNP Paribas Asset Management Caisse des Dépôts Calvert Carbon Disclosure Project Centre Info Cheuvreux CM-CIC Asset Management Crédit Agricole Asset Management Deutsche Asset Management Dexia Asset Management Domini Social Investments E. Capital Partners Spa Economistas sin Fronteras ESADE Ethical Investment Research Service (EIRIS) Ethix SRI Advisors AB Ethos F&C Management Fédération des Experts Comptables Européens (FEE) Forética Fortis Investments FTSE Fundación Ecología y Desarrollo (ECODES) Generation Investment Management LLP GES Investment Services Global Exchange for Social Investment (GEXSI) Good Bankers Greenpeace Groupama Asset Management Henderson Global Investors Highland Good Steward Management HSBC I.DE.A.M INrate Insight Investment IONIS Inter Expansion KBC Asset Management KLD Research & Analytics, Inc. KLP KPMG Living Planet Fund LODH MACIF Gestion Manifest Mercer Morley Fund Management Natixis Asset Management Oddo Securities Oekom research Oikocredit Pictet Asset Management SA Pioneer Investments Robeco SAM Sustainable Asset Management Schroders SiRi Company Ltd Société Générale Asset Management SNS Asset Management Standard Life Investments Triodos Bank Trucost UBS AG Vigeo Group VINIS West LB WWF NATIONAL SIFS IN EUROPE Belsif*, Belgium Forum Nachhaltige Geldanlagen*, Germany Forum per la Finanza Sostenibile*, Italy Forum pour l Investissement Responsable*, France Spainsif, Spain Swesif, Sweden UK Social Investment Forum*, UK VBDO (Vereniging van Beleggers voor Duurzame Ontwikkeling)*, The Netherlands * Member of Eurosif Board High Net Worth Individuals & Sustainable Investment I TABLE OF CONTENTS Acknowledgments... Forewords... Executive Summary I. Background... II. Methodology and Scope of Research... III. Market Receptivity... IV. Market Size and Growth... V. Sustainable Investment Products... VI. Allocations... VII. Products Origin... VIII. Opportunities and Obstacles... Glossary... Appendix 1 Questions you should ask... Appendix 2 Performance - Examples of sustainable investment indices... Appendix 3 Eurosif questionnaire ACKNOWLEDGMENTS We extend a heartfelt thanks to Bank Sarasin and KPMG for their sponsorship of this first-ever study of the European High Net Worth Individual (HNWI) sustainable investment market. A special thanks to Greg Chipman for his contribution to the report. We are also grateful to our distribution partners who helped disseminate the questionnaire across the EU. Our substantial base of Member Affiliates and the National Social Investment Fora (SIFs) provided input into this study and continue to offer significant support of Eurosif s mission to Address Sustainability through the Financial Markets. Finally, we wish to recognise our appreciation to the many individuals from private banks and family offices who responded to our questionnaire without whom this study would not have been possible. Distribution Partners The Private Banking Group of ABBL (the Luxembourg Bankers Association) Crédit Agricole Asset Management Distribución - Madrid Cleantech Group Family Office Exchange (FOX) P3 Ventures UNEP Finance Initiative The views in this document do not necessarily represent the views of all Eurosif member affiliates. This publication should not be taken as financial advice or seen as an endorsement of any particular company, organisation or individual. While we have sought to ensure that this information is correct at time of print, Eurosif does not accept liability for any errors. Eurosif All rights reserved. It is not permitted to reproduce this content (electronic, photocopy or other means) without the explicit and written permission of Eurosif. 4 High Net Worth Individuals & Sustainable Investment I 2008 FOREWORD FROM EUROSIF Effectively addressing Sustainability is one of the most pressing challenges worldwide today. Humanity s footprint first outgrew global biocapacity in the 1980s, and at the current rate, it takes at least fifteen months for the Earth to produce the ecological resources used in a single calendar year. 1 Investors have an important role to play in reducing this footprint by combining sustainability issues with an investment rationale for win-win results. Since its foundation, Eurosif has focused on specific aspects of the EU financial markets to illustrate ways in which investors can and do play a meaningful role in addressing sustainability issues this has ranged from attention to public equities to venture capital. This new study focuses on the rapidly growing High Net Worth Individual (HNWI) category, a diverse group that nevertheless is collectively combining social responsibility with substantive financial returns. There are a number of different studies looking into the HNWI market, but this is the first-ever study to specifically address the European HNWI sustainable investment market. You will find in this survey current investment trends, strategies, opportunities and obstacles that HNWIs face today. We have included pertinent quotations that we found through our interviews as well as examples of current practices of private banks and family offices around sustainable investment. Eurosif expects this work to be a helpful tool for their efforts to better understand and meet the growing demand for products and services in this exciting market. Over time, we expect sustainable products and services to be developed for the HNWI market that address a range of wealth management needs, beyond just investment solutions. Eurosif looks forward to tracking these trends in future studies. Whether you are an HNWI, a private bank or an interested sustainable investment actor, we believe the High Net Worth Individuals & Sustainable Investment study will better clarify this dynamic space and may even inspire you to enter this area. Sincerely, Matt Christensen Executive Director Eurosif Robin Edme President Eurosif 1 The Ecological Footprint measures humanity s demand on the biosphere in terms of the area of biologically productive land and sea required to provide the resources we use and to absorb our waste. Source: WWF Living Planet Report 2006 High Net Worth Individuals & Sustainable Investment I FOREWORDS FROM OUR SPONSORS BANK SARASIN & CO. LTD On 1 November 1986, a chemical warehouse at Schweizerhalle near Basel was destroyed by a fire. Due to the inflow of toxic, red-coloured fire fighting water, aquatic life in the Rhine River suffered severe damage all the way to the North Sea. This shock came on top of the meltdown of the Chernobyl nuclear power plant in April of this annus horribilis. Those incidents with one being right on our doorstep led the people living in Basel, which is a city interspersed with large chemical and pharmaceutical plants, to change their perception. As one consequence, the financial analysts of Bank Sarasin began to pay attention to the risks and opportunities for companies from an environmental perspective. But who would be willing to listen to them? It was a number of individuals among our private banking clients who took a keen interest in applying this new investment philosophy from its very beginnings. The subsequent dialogue with them led to further innovations in the years to follow. Today, the approximately 5 billion we are currently managing according to sustainability criteria originate from all segments: retail, institutional and of course private clients. When Eurosif asked us to support a study specifically addressing the European HNWI sustainable investment market there was no hesitation. As High Net Worth Individuals are our partners from the very beginning we wanted to know more about their current thinking and future needs. The results of the study clearly show that wealthy investors are at the very heart of sustainable investment. Additionally, this study clears up the distorted picture that large private capital owners are responsible for most ecological and social problems of today. The investment strategy of High Net Worth Individuals is NOT part of the problem but part of the solution! Sincerely, Andreas Knörzer Executive Director KPMG KPMG is a global network of professional services firms providing Audit, Tax and Advisory services. We have over 123,000 outstanding professionals working together to deliver value in 145 countries. We are especially proud to be among the world s leading Financial Services advisors employing over 20,000 professional staff providing focused services to the banking, insurance, investment and wealth management sectors. This experience allows us to understand how sustainability factors are increasingly shaping international capital markets and what product development and broader service opportunities will be available to financial institutions and other key stakeholders. It also enables us to identify what business practice re-engineering is required to capitalize on such opportunities and to help mitigate risks in a rapidly changing global environment. We are delighted to be working with Eurosif in tracking what we believe will be seismic shifts in the institutional, high net worth (HNW) and retail wealth management markets. In particular, as a global industry segment forecast to grow dramatically by 2012 (Eurosif), the HNW market can be seen as a natural base for the extension of sustainability trends incubated in institutional investment markets and a key influencer of broader consumer demand. Ultimately, the international HNW market may also provide a significant source of private sector capital to complement public sector funding of sustainability focused industries, products, services and business practices. Its potential relevance therefore to financial institutions, governments and regulators as both a source for sustainable business growth and contributor to the success of global emission reduction strategies should be noted. Sincerely, Tom Brown Partner Head of Investment Management in Europe 6 High Net Worth Individuals & Sustainable Investment I 2008 EXECUTIVE SUMMARY HNWI & SUSTAINABLE INVESTMENT The role of High Net Worth Individuals (HNWIs) is increasingly becoming relevant to investors that are seeking returns while engaging on sustainability issues. This inaugural study on the EU HNWI and sustainable investment market finds that there is indeed significant interest in this space, and it is growing quickly. There are three drivers in the intersection of HNWIs and sustainable investing which will result in a shaping and growing of the overall SRI market in the coming years: The amount of wealth available for investing by this group is at an all time high and projected to expand further. The demand for sustainability criteria as an offering within this sector is growing largely due to a generational shift in thinking about capital growth and preservation as well as financial outperformance prospects. The HNWI market traditionally acts as an early signal of investing appetite for future asset allocations of more mainstream institutions. Although fairly recent, the Eurosif survey shows that the interest in the field is now significant. The market is in an early, high growth phase with 72% of respondents seeing an increase in HNWI interest for sustainable investment in the last 12 months, principally driven by market demand. In spite of the recent market turmoil, 87% of respondents think the interest for sustainable investments will grow in the next three years. Moreover, 75% of surveyed family offices think that sustainable investment will increase in the generational transfer of their family s wealth. At the present time, HNWIs often rely on a close circle to find the right sustainable investment opportunities that respond to their specific needs; this is partly due to a lack of appropriate product offerings but also equally due to wariness of wealth manager motives. In order to service this market effectively, it requires wealth managers to gain a comprehensive understanding of HNWIs goals both financial and sustainable. The main drivers of demand for sustainable investment are responsibility, the search for sustainable return and financial opportunity. To effectively service this quickly growing market, Eurosif believes the following are essential: A clear understanding of HNWI investors motives around sustainable investment, in order to develop or find the proper financial products that share and reflect their concerns. Demonstrable examples of market rate performance to convince HNWI clients that sustainable investment can perform as well as other traditional investments. Improved information and education on sustainable investment for the HNWI and wealth manager communities. We hope this study is a first step towards better understanding and meeting the growing demand for products and services in this dynamic market. Based on the findings of this survey, Eurosif is convinced that the growth of HNWI interest in sustainable investment will steadily correlate towards a greater openness to integrate these issues into other levers of society. Eurosif estimates that sustainable investments represent approximately 8% of European HNWIs portfolios as of December 31, 2007 and predicts that by 2012 the share will have increased to 12%, surpassing the 1 trillion mark. The sustainable investment strategy most often employed among HNWIs is thematic investment, with clean energy and water as their preferred sustainable themes. The study shows that HNWIs are open to new and alternative sustainable investments. Eurosif believes that servicing the HNWI segment offers great opportunities for product innovation which could eventually prove useful for other investor segments such as institutional investors. About a third of sustainable products are currently bespoke sustainable investments, which are vital to product development. High Net Worth Individuals & Sustainable Investment I BACKGROUND I. WHAT IS SUSTAINABLE INVESTMENT? Eurosif defines Sustainable Investment 2 as an investment philosophy that combines investors financial objectives with their concerns about Environmental, Social, and Governance (ESG) issues. Sustainable investors expect market rate returns over the medium to long term time horizon, and ESG issues are increasingly important factors in determining long term investment performance. Representing up to 15% of the European institutional financial markets, sustainable investment has attracted the attention of mainstream players that range from large public and private investors, policy makers, multinational companies and the greater public. Examples of sustainable investment used by HNWIs include negative screening (excluding sectors such as weapons, tobacco, etc. from a fund); positive screening (investing in companies with a commitment to responsible business practices or that produce positive products); thematic investing based on sustainable issues (clean energy, water, climate change, lifestyle, etc.); and community investing (underprivileged economic and geographic areas). Sustainable investment is now applicable to any type of financial product (stocks, bonds, public debt, private equity, property, etc.) even though it was originally mostly applied to publicly listed companies. A key challenge for sustainable investors is in investing for the long term while facing short-term pressures. There is rarely a simple answer to the complicated puzzle of combining money-making with sustainability criteria. For example, in evaluating a company s ESG issues, some investors will find the environmental policies to be the key input while others will point to the company s human rights practices as the critical issue. It is this sort of complexity that makes sustainable investment a dynamic field where ESG considerations, properly integrated, can lead to financial out-performance. WHY RESEARCH HIGH NET WORTH INDIVIDUALS & SUSTAINABLE INVESTMENT? The High Net Worth Individual (HNWI) 3 market has been growing at an increasing clip over the past decade. The importance of this market is only now becoming clear to practitioners who traditionally service the SRI institutional and retail SRI market. Eurosif believes there are a number of trends that will result in a closer connection between HNWI and sustainable investing in the years to come, yielding positive effects for the entire market: First, the amount of wealth available for investing by this group is at an all time high and projected to expand further with the coming retirement of the baby boomer generation. In Europe, the HNWI population was estimated to be 3.1 million in 2007, with a total wealth of $10.6 trillion ( 6.75 trillion), an increase of 5% since This amount is forecast to reach $13.5 trillion in 2012 as illustrated in Figure 1. Globally, HNWI wealth is forecast to grow to US$59.1 trillion by This vast pool of funds will offer liquid, international product development opportunities for sustainability aware providers, which European HNWI can be expected to continue to tap into. FIGURE 1 HNWI Financial Wealth Forecast (By regions) $US Trillions Second, the demand for sustainability criteria as an offering within this sector is growing largely due to a generational shift in thinking about capital growth and preservation (as evidenced later in the report) as well as financial out-performance prospects. Global fund managers and asset allocation consultants are increasingly highlighting the link between ESG performance, corporate performance and the delivery of shareholder value on a medium to long term basis which typically corresponds with HNWI investment timeframes and wealth management horizons. An illustration of this shifting perspective manifested itself in the 2007 World Wealth Report, a mainstream publication by Capgemini & Merrill Lynch; for the first time ever, a section of the study was devoted to the growing demand for socially responsible investments. In their financial advisors survey, respondents were asked 2 also called Socially Responsible Investment (SRI) or Responsible Investment (RI). In the context of the HNWI market, we think the term Sustainable Investment is more appropriate and it will be used throughout the report, although some mentions of SRI will occasionally be cited. A glossary is available at the end of the report. 3 HNWIs are defined as individuals with more than $1 million in financial assets, excluding primary residence. In this report, our references to HNWI include both High Net Worth Individuals and family offices. Please see glossary World Wealth Report Capgemini & Merrill Lynch. Exchange rate from USD to Euro as of June 9, 2008. 8 High Net Worth Individuals & Sustainable Investment I 2008 how often their clients requested SRI screens and how much of their current portfolios were dedicated to this strategy. As illustrated in Figure 2, in Europe it was estimated that 6% of the overall HNWI funds were in SRI. FIGURE 2 HNWIs Interest in Socially Responsible Investments, 2006 (%) (by regions) Source: Capgemini / Merrill Lynch Financial Advisor Survey, March 2007 Further, as sustainability reporting, emission trading schemes, carbon markets and international government commitments to emission reduction targets continue to evolve, so too will emerging industry opportunities on a global basis. Such developments, complemented by appropriate regulatory frameworks and public funding will provide the mechanism for directing private sector capital (including HNW investment) towards sustainably focused companies and industry sectors. By way of example, it is forecast that investment in sustainable energy sectors will need to treble to $450 billion a year by 2012 in order to meet stated global emission targets. Global carbon markets grew to $64 billion in 2007, an increase of 123%
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