SRI investment: to reconcile ethics and profitability

Computing concept

Generating performance while simultaneously having positive effects for society and contributing to a better world? This may seem too good to be true… yet it is the objective of SRI (Socially Responsible Investment) which has become the new focus of an ever-increasing number of investors who want to make sense of their investments, reflecting a major shift in attitudes in a general context where social and environmental concerns are gaining in importance in public opinion and the media, as for example with climate change, which has now become a sensitive issue for many citizens. This is why SRI, which consists in taking into account not only the traditional financial risk/performance criteria but also extra-financial ESG criteria (Environment, Social and Governance), has recently experienced unprecedented growth, which represents a real opportunity to position and develop skills and know-how in this promising field, and a source of innovation.
However, its origin is not new. Indeed, responsible investment has its origins in England since the 18th century, with the Quaker religious philanthropic movement “actively engaged against slavery, corsair activity or any act of violence”1 and then at the end of the 19th century in the United States by religious communities concerned to exclude from their portfolios investments that contradict their moral values (such as arms, alcohol and tobacco)1. Thus, the so-called “exclusive” approach is the original method of SRI funds.
Then in the early 1970s, still in the United States, the first SRI fund in the modern economy, the “Pax World Fund”, was launched in 1971. Accessible to individual investors, it made it possible to invest in non-armaments-related companies 1, “pax” meaning “peace” in Latin.

the respect and development of the person who leads the company’s social strategy and the ways of setting up in Third World countries”.1

Since the very beginning of the 21st century, we have seen an acceleration in regulatory developments in France, aimed at promoting sustainable investment by the authorities: voted in 2001, section 116 of the law on new economic regulations, impose on companies sides to take into account “the social and environmental consequences of its activity 2. Then in 2009, a first European private SRI Label was created in France by Novethic, a non-profit organisation financed by Caisse des Dépôts.4 Followed, on 28 September 2015, by the official announcement of the creation of a public SRI label with a other SIR label entitled “Transition énergétique et climat” by the then Finance Minister, Mr Sapin. 

Following the 2008 financial crisis, attitudes have changed more among investors, particularly in the United States, with a growing awareness of the need for more ethical reasoned finance, adding other SRI approaches to this concept. Each of these developments has complemented and enriched previous contributions with the constant concern to better analyze the societal and environmental impact of investments, while facilitating the adoption of these approaches by the greatest number of investors. After the “exclusive” historical approach, there are three other approaches1 :

– The “ESG selection”, which allows a better measurement of corporate social responsibility. It is no longer just a question of excluding controversial companies, but rather of identifying and investing in those that have the highest non-financial ratings and promote the most responsible practices, in particular the fight against global warming or more generally the improvement of the living conditions of local populations.

– The “thematic approach”, which as its name suggests focuses on a particular theme such as renewable energies, water, health, etc.

– The “shareholder engagement” (or shareholder activism) that consists for investors in demanding from companies a stronger social responsibility policy through direct dialogue between the different stakeholders, and also through the exercise of voting rights in general meetings.
Driven by an ever-increasing improvement in the supply, the global SRI market has nowadays reached a significant weight. Indeed, according to the 2016 annual study by the Novethic research centre specialising in responsible finance, the French responsible investment market continues to grow and at the end of 2015 was worth €746 billion in France, compared with €579 billion in 2014 4. The outstanding amounts recorded in responsible investment therefore increased by 29% year-on-year.

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Many funds are now available in the SRI universe, including bond issues such as the Fairtrade Access Fund3, launched in 2012 by Incofin Investment Management which offers long-term loans to agricultural cooperatives that they need to renew their farms or adopt new technology and equipment.

This is also the Triodos Sustainable Bond Fund, which takes into account the conditions for extracting raw materials under the SRI filter:” “We have asked a company to stop using tin from conflict areas.” “says Eric Holterhues, SRI manager at Triodos IM 7. A specialised index was even created in 2014: the Barclays MSCI Green Bond Index.8 Note also that the public pension fund ERAFP has made socially responsible investments for all its assets.6

With regard to the main growth drivers of SRI, we can identify an offer more actively offered to investors than in the past: “At BNP Paribas Fortis, every new Private Banking client receives as its first proposal a sustainable solution” according to Guy Janssens, Head of Sustainable and Responsible Investments at BNP Paribas Fortis.7

On the other hand, this sustained growth is also driven by the growing demand from investors themselves: “We are receiving more and more requests from institutional investors[…] convinced that in the long term, sustainable products are more profitable than ordinary investments,” according to Ophélie Mortier, responsible investment strategist at Degroof Petercam.7

However, despite significant growth and success, SRI is subject to various criticisms. One of the most recurrent concerns the difficulty of effectively measuring the social impacts generated. Therefore, to preserve its credibility, responsible investment must meet an important challenge: to rely on the complete integrity of reporting, and to do so to guarantee an irreproachable impartiality of analysis and evaluation standards, particularly of non-financial rating agencies, thus ensuring the veracity of the information enabling the positive impact to be accurately measured throughout the investment process.

Furthermore, for a better readability, transparency, and to consolidate SRI, especially at the European level, it would be advisable to set up international standardized standards for social and environmental impact assessment, as each agency currently has its own methodology, which does not simplify the comparison between their different assessments.

An additional question also arises as to whether it is reasonably plausible to extend the scope of SRI to precious metal derivatives, with regard to the social and environmental damage they may cause and therefore may be considered incompatible with the scope of SRI.

In the end, it is therefore a particularly demanding investment strategy, requiring skills, know-how, critical thinking and integrity. Thanks to several positive combined factors feeding a virtuous circle of supply and demand, there is a tremendous opportunity to participate in the development of a responsible and innovative alternative finance, for portfolio managers concerned with improving the future of the company by contributing to the public interest, and to transmit a properly preserved state of the planet to the next generation of investors. All that is missing is a real willingness and support on the part of public authorities so that ethical investment can claim a prominent place in the asset management landscape.

Sources:

With regard to the main growth drivers of SRI, we can identify an offer more actively offered to investors than in the past: “At BNP Paribas Fortis, every new Private Banking client receives as its first proposal a sustainable solution” according to Guy Janssens, Head of Sustainable and Responsible Investments at BNP Paribas Fortis.7

On the other hand, this sustained growth is also driven by the growing demand from investors themselves: “We are receiving more and more requests from institutional investors[…] convinced that in the long term, sustainable products are more profitable than ordinary investments,” according to Ophélie Mortier, responsible investment strategist at Degroof Petercam.7

However, despite significant growth and success, SRI is subject to various criticisms. One of the most recurrent concerns the difficulty of effectively measuring the social impacts generated. Therefore, to preserve its credibility, responsible investment must meet an important challenge: to rely on the complete integrity of reporting, and to do so to guarantee an irreproachable impartiality of analysis and evaluation standards, particularly of non-financial rating agencies, thus ensuring the veracity of the information enabling the positive impact to be accurately measured throughout the investment process.

Furthermore, for a better readability, transparency, and to consolidate SRI, especially at the European level, it would be advisable to set up international standardized standards for social and environmental impact assessment, as each agency currently has its own methodology, which does not simplify the comparison between their different assessments.

An additional question also arises as to whether it is reasonably plausible to extend the scope of SRI to precious metal derivatives, with regard to the social and environmental damage they may cause and therefore may be considered incompatible with the scope of SRI.

In the end, it is therefore a particularly demanding investment strategy, requiring skills, know-how, critical thinking and integrity. Thanks to several positive combined factors feeding a virtuous circle of supply and demand, there is a tremendous opportunity to participate in the development of a responsible and innovative alternative finance, for portfolio managers concerned with improving the future of the company by contributing to the public interest, and to transmit a properly preserved state of the planet to the next generation of investors. All that is missing is a real willingness and support on the part of public authorities so that ethical investment can claim a prominent place in the asset management landscape.

Sources:

8>sup>https://www.msci.com/eqb/methodology/meth_docs/Barclays_MSCI_Green_Bond_Indices.pdf

Valentin MATE

Valentin MATE


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