By Sandrine TESNER:
With the support of Bank Sarasin, Eurosif has published its 2012 report on European high-net-worth individuals (HNWIs) and sustainable investment. Report findings are based on surveys sent to over 500 wealth managers (supply side) and European HNWIs themselves (demand side). Four SRI strategies were considered in the surveys: 1. sustainability-themed investments; 2. best-in-class and positive screening; 3. norms-based screening and exclusions (negative screening); and 4. impact investing. The latter, increasingly of interest to HNWIs, includes microfinance, community investing, and social businesses.
According to the RBC-Cap Gemini “2012 World Wealth Report”, the total
investible assets of European HNWIs stood at 7.8 trillion euros at the end of 2011. First among these investors’ concerns was the Eurozone crisis and its effect on national fiscal and regulatory policies, including tax increases. Eurosif estimates that 1.15 trillion euros were invested in SRI methodologies and vehicles in 2011 vs. 729 billion in 2009 and 460 billion in 2006, the report’s base year. One significant caveat, of course, is that the content of the definition of SRI methodologies has not remained static over the period, although this does not necessarily mean that more methodologies are accounted for in the latest report.
According to survey results, 73% of respondents had demonstrated increased interest in SRI issues over the 12-month period preceding the release. At the same time, 47% of respondents had increased their investments. Growth in the total amount invested in SRI strategies came primarily from new entrants and increased investments by existing clients. The number of investors allocating more than 50% of their portfolio to SRI has doubled to 25%. 67% of respondents use norms-based and exclusion strategies while 60% resort to positive screening and 69% pursue sustainability-themed investments. Strong interest in the latter, however, does not imply that most assets are allocated to this strategy. Overall, environmental issues (water, climate change, green technology, clean energy) account for 72% of sustainability-themed investments. Impact investment, defined as “investment made with the intention of generating social and environmental impact in addition to financial return”, is now of interest to 49% of respondents vs. 24% in 2009.
Geographic asset allocation was as follows in 2011: 22% domestic, 29% Europe, 19% North America, 14% Asia, and 16% emerging markets.
In terms of investment culture, 55% of respondents in 2011 indicated long-term support of sustainable investment. 51% of respondents define sustainable investment as a financial discipline while only 2% consider it as an asset class; 40% deem it an investment style. According to private bank asset managers, the investors most interested in sustainability issues tend to be younger entrepreneurs, and women show a greater interest than men. They also tend to be ultra-wealthy.
A look at the drivers for SRI among HNWIs reveals some surprises. “Making a contribution to sustainable development” tops the agenda for both HNWIs and wealth managers, With 23% of the total. HNWIs cite “generational transfer of wealth” as driver #2 while wealth managers cite “fiduciary responsibility to the client”. Financial motivations come in third place for both categories of respondents.
It is interesting to compare these findings with those of the “World Ultra Wealth Report 2012-2013” recently published by the consulting entity Wealth-X.
1. While we know that the Asia-Pacific region became home to the largest number of HNWIs in 2011 (see Cap-Gemini’s Asia-Pacific Wealth Report, 2012), the number of Ultra HNWIs was down 2.1% in Asia in 2012. In the region, Indonesia saw a 41.2% increase in the total wealth of UHNWIs. Total Asian UHNW wealth is expected to top the US’s by 2020.
2. Other emerging and frontier market regions, however, saw significant growth in the numbers of UHNWIs: those were up almost 6% in Oceania, +2.2% in the Middle East, and +5.1% in Africa.
3. Furthermore, Wealth-X estimates that the world population of UHNWIs will rise close to 4% per annum in the next five years, their wealth rising 5.5% annually.
4. Most importantly, Wealth-X forecasts that the largest increase in the number of UHNWIs will occur in Africa, with close to 7% annual growth in the next five years. In 2012, the rise in the number of UHNWIs by country was as follows: Tunisia (+16.2%), Angola (+11.1%), Tanzania (+10.1%), Libya (+8.6%), and South Africa (+8.3%). Angola is expected to top Africa’s rise in the number of UHNWIs in the next five years.
5. The combined wealth attributable to the Latin American UHNWI population is expected to rise 12.1% per annum over the period, faster than the African rate (11.2%).
So, where are the areas of overlap connecting wealth management, emerging and frontier markets, and sustainable investment? Three key areas can be pinpointed:
1. Firstly, recent and forecasted trends demonstrate that emerging and frontier markets will witness the highest increase in the numbers of both HNWIs and UHNWIs in coming years, with African frontier markets showing particular promise.
2. Secondly, emerging and frontier markets still have to catch up with industrialized nations in the integration of ESG analysis and criteria in investment decisions, as well as the development of financial products embedding these criteria. Emerging and frontier markets therefore constitute a growth area for ESG and SRI topics, services, and products.
3. Finally, many of the projects that UHNWIs and HNWIs are interested in funding, whether through microfinance, impact investing, or philanthropic mechanisms, are likely to be located in emerging and frontier markets, because it is in such nations that the challenges of sustainable development linked to the use of resources, energy, governance, and population growth will be the steepest in years to come.
For asset managers and private banks, the implication should be clear, namely the need to develop an expertise and staff combining knowledge and skills in both SRI and emerging markets.