Socially responsible investment – declining or improving?

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For more than two decades now, we have known that SRI has been trying to drift beyond its initial objective, ethics. The integration of “ESG” criteria (Environmental, Social, Governance) has effectively enabled SRI to acquire a new reputation, that of completing a company’s basic financial analysis for an investment decision.

Since then, flows towards responsible investment have increased steadily. According to the Global Sustainable Investment Aliance (GSIA) study released in 2016, responsible investment has risen by 25% since 2014. It now has a global management of $22,890 billion. Steven Smith, Head of Sustainable Department at Morningstar, highlights the SRI trend in corporate management. During the Morningstar Institutional conference on 16 March in Amsterdam, he quoted: “Flows to sustainable equity funds are still relatively low but they are growing in both active and passive management”.

Already, many serious university studies from schools such as Harvard, Oxford, or Columbia have examined the subject. New research continues to highlight the risk mitigation role of ESG analysis. The study “Assessing Risk through Environmental, Social and Governance Exposures”, published this winter 2017 by the management company AQR Capital, highlights the correlation of ESG criteria in the statistical risk of companies. The authors describe: “Securities with low ESG exposure tend to have higher total and specific risks and higher betas, both immediately and up to five years”. They add: “We interpret these results as evidence that ESG information can play a role in investment portfolios that goes beyond ethical considerations and can inform investors about the degree of risk of securities in a way that complements what traditional statistical risk models can capture. According to this study, therefore, combining the two models allows investors to reduce their portfolio risk.

More specifically, this same study highlights the elementary contribution of social and governance criteria to the reduction of risks subject to a company’s status. Conversely, the environmental component is considered to be very poorly correlated with the various risk measures. In this sense, the launch on 24 March of an index incorporating the theme of governance will allow investors to clearly see this estimate. Indeed, the stock exchange operator Euronext, in collaboration with the research agency ESG Vigeo Eiris, recently created the CAC40 Governance index. This benchmark includes the companies in the CAC40 flagship index according to their quality in terms of responsible governance.

The famous Norwegian fund has recently disclosed the negative contribution of its SRI choices to its performance. It estimates a loss of $1.3 billion due to its SRI decisions alone. In the eyes of many investors, this deficit, evaluated by one of the largest funds in the world, directly challenges the contributions of the ESG analysis. During an interview for L’AGEFI, Thierry Philipponnat, President of the FIR, nuanced this news: “On a management level, this represents 0.015% less annual return, which is therefore not necessarily significant”. This is indeed 1.3 billion losses but out of a total of 850 billion managed. Especially since this loss is estimated over a total period of 10 years. Thus, SRI choices underperform by 0.15% over 10 years, i.e. only 0.015% per year. Thierry Philipponnat adds: “This announcement does not reflect what can be observed elsewhere. Knowing that these figures, moreover, are absolutely insignificant when compared to the time period over which they are analysed and especially on the total investment made”. 
However, a major gap remains in SRI investment. Despite growing demand for this type of investment, the quality of supply is slow to consolidate. The lack of communication and transparency by companies on their approaches to the environment, social progress and governance remains an obstacle to ESG investments. They impact both the quality of the data and its consistency. Ultimately, however, this last condition would make it possible to compare companies with each other for fundamental investment decision-making. As proof, the report, entitled “The Investing Enlightenment”, reveals institutional investors’ expectations of ESG. In fact, almost all institutional investors surveyed expect companies to explicitly identify the ESG factors that actually affect their performance. For 60% of them, the lack of professional standards in this area is a major obstacle to measuring their ESG performance. The survey also shows that 46% of private investors worldwide want more companies to publish their ESG investment performance data.

Responsible investment therefore always seems to have a bright future ahead of it, given that not all the conditions required for optimal analysis have yet been met, while demand in this direction continues to put pressure on.

http://www.statestreet.com/content/dam/statestreet/documents/Articles/The_Investing_Enlightenment.pdf

http://www.gsi-alliance.org/wp-content/uploads/2017/03/GSIR_Review2016.F.pdf>

http://www.agefi.fr/governance/actualites/video/20170328/and studies show how it is possible to reconcile-isr-214780?utm_source=newsletter&utm_medium=daily_17h&utm_campaign=28032017

https://www.aqr.com/library/aqr-publications/assessing-risk-through-environmental-social-and-governance-exposures

 

Marine Brabec

Valentin MATE


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