ISR, ESG, RSE, ESS, ODD, Engagement, Exclusion, Impact Investing, Best in Class, COP21, LTECV, CDP… Why make it simple when you can make it complicated?

Socially Responsible Investment (SRI) has a 300-year history. At the origin of SRI is the willingness to invest in accordance with its values. This will mainly result in the refusal to finance certain sectors but also in the desire to support the most disadvantaged. The religious philanthropic movement’Quaker’, for example, refused to invest in arms and the slave trade and advocated integrity and solidarity. The development of SRI has been eventful but very real and mainly driven by the emergence of new approaches such as ESG criteria, for Environment, Social, Governance, or sustainable development themes thanks to a mobilisation around climate change. But for most investors, SRI is still far too vague a concept. If it were to be summed up in one word, one could agree to use the word: utility. Indeed, this is the very principle that governs this management style because it makes it possible to make the investment useful for society. This term, which seems to be a good seller, must be accompanied by a transparency obligation.

Some will consider the addition of extra-financial criteria in asset management to be destructive of performance, while others will criticize the purely marketing aspect of SRI. In order to counteract these hasty judgements, it seems essential to bring to the forefront the scope of SRI and the benefits provided by this management style.

The purpose of this exercise is not to preach to the convinced, but rather to bring to the forefront an alternative to traditional asset management unfortunately still too focused on the short term and immediate returns.

Some approaches focus more on what the company produces, others on how it behaves.

    • exclusion: for ethical reasons, linked to sustainable development or public health for example, certain activities are excluded: tobacco, weapons, fossil fuels, nuclear energy, etc.
    • sustainable themes: certain themes or sectors are structurally privileged because they are considered to contribute positively to sustainable development: renewable energies, energy efficiency, water, etc.
    • l’impact investing: this investment aims, in addition to financial performance, to achieve a concrete environmental or social impact, for example by enabling certain disadvantaged communities to improve their standard of living: microfinance, energy access projects, agricultural development in emerging countries, etc.
  • Approaches focusing on corporate behaviour include:
    • le Best in Class: after a detailed review of the environmental, social and governance policies of the companies in the investment universe, the “most responsible” companies in each sector are selected.
    • The Best in Class does not imply a priori sectoral deviations but many variants of it such as the Best in Universe or the Negative Screening implies them.
    • Normative filters: they aim to exclude companies that do not comply with certain international conventions such as the United Nations Global Compact.
    • Commitment: rather than excluding companies with weaknesses in certain ESG aspects, the manager will engage in a structured dialogue with them to try to change their practices.

Of course, all these approaches can be combined, which can further complicate the understanding of the approach. But then why are there so many ways of doing SRI?

  • Each one has his own idea of what is socially responsible:
      • Most French investors have a positive or neutral view of nuclear power, unlike their neighbours.

     

  • Responsible managers and investors pursue different objectives:
    • Materiality or responsibility: some focus on ESG issues that can have an impact on the value of the company and therefore on a limited number of criteria while others favour a holistic view of the company whether the issues are material or not.
    • Risk conviction or budget: strong SRI convictions can lead to significant sectoral deviations that do not always meet institutional investors’ allocation and risk budget constraints.

This complexity, which results from the history of SRI and the different needs of investors, may at first sight be perceived as daunting, but it is in fact an opportunity for investors to invest in an SRI fund that truly meets their expectations and answers the question: What is important to you?

  • The reputational risk: choose a fund with at least one normative filter.
  • Get a performance that is not too far from that of the benchmark index while being SRI: favour a Best in Class approach without adding exclusionary or normative filters.
  • Avoid certain long-term ESG risks: opt for a Best in Universe or Negative Screening approach or, at a minimum, for a Best in Class approach focused on materiality.
  • Having an impact in terms of sustainable development: focus on investing impact and sustainable themes.
  • Benefit from financial opportunities linked to structural changes: focus on sustainable themes.

According to a meta-analysis combining 2200 studies conducted in 2015 by Friede, Busch and Bassen, about 90% of the data conclude that the use of ESG criteria in asset management does not penalize the company’s financial performance. More importantly, the vast majority of studies report superior results compared to traditional asset management.

ESG factors are of strategic importance in asset management, an ESG risk optimization approach within an asset allocation contributes to increasing the potential for performance while minimizing risks. A comparison between different diversified portfolios showed even more conclusively that the risk of the portfolios could thus be reduced by about a third.

It is therefore possible to have a positive impact thanks to its investments, making them useful to society, without any counterpart in terms of performance.

Hugo KAISER

Hugo KAISER

Hugo Kaiser a rejoint le monde de la gestion d’actifs en janvier 2015. Après avoir suivi un Master 1 en Finance Internationale à l’INSEEC Lyon, Hugo s’est doté d’un Master 2 en Management Environnemental et Energétique. Il s’est par la suite spécialisé dans les marchés financiers en intégrant le Master 2 Trading - Finance de Marché de l’ESLSCA Business School Paris. Hugo est basé à Genève depuis septembre 2017, il est en charge du développement à l’international de Sanso IS.


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