New frontiers in socially responsible investing
06.04.2016 | Sustainable finance
Reconciling performance and positive impact
Socially responsible investing (SRI) meets two major challenges: achieving financial performance and ensuring a positive contribution to Environmental, Social and Governance (ESG) performance. “By adding these extra-financial criteria to classic financial management, SRI enables investors to promote their values and gain a better understanding of the impact of their investments,” Jacky Prudhomme explains. SRI has long targeted institutional customers, but it is now attracting more and more individual customers. “BNP Paribas, through its retail banking network, is the first bank in France to supply SRI solutions to individual customers.”
New approaches, new asset classes
A diversification of its customer base is not the only change impacting SRI of late. “New forms of SRI have also emerged. Alongside traditional approaches, including the widely known Best-in-Class label, which selects the top-performing companies in extra-financial criteria, thematic funds have also gained traction. The most popular of these are green funds which may focus on renewable energies, waste management or preserving water resources,” Jacky Prudhomme continues. But new social impact funds are also becoming available, including funds that invest in human development (access to education, healthcare, etc.) or in the solidarity economy (professional integration for vulnerable individuals, inclusion through housing, etc.). “Solidarity funds are seeing a high level of interest that will only grow with the arrival of new tools like social impact bonds and the increased needs of the growing Social and Solidarity Economy sector,” Jacky Prudhomme says.
SRI now also covers new asset classes, no longer just stocks and bonds. “Real estate and private equity are gradually entering the SRI market. At BNP Paribas Investment Partners, we launched a socially responsible real estate fund in 2011,” he says.
To keep pace with the expanding range of SRI products, new label standards have continued to develop, such as the long established Novethic label and now the SRI and Energy Transition labels. “Ensuring transparency, these labels offer a point of reference to investors and savers. They also build on the efforts we take to inform our targets, including the general public,” Jacky Prudhomme says.
But how can we measure the environmental or social impact of an SRI portfolio? “Different labels require the publication of regular reports to enable savers to monitor the extra-financial performance of their investments, using various indicators like CO2 savings generated, number of jobs created, etc. BNP Paribas IP is one of the first asset managers to sign the Montreal Carbon Pledge, an initiative that promotes measuring and monitoring the carbon footprint of managed portfolios,” Jacky Prudhomme explains. Yet another way for BNP Paribas to contribute to the fight against global warming.
What will SRI look like tomorrow? “ESG criteria will soon be integrated into the management of all portfolios, both SRI and traditional,” Jacky Prudhomme predicts. To analyze a company’s performance, managers will not only look at financial results, but will also consider its environmental, social and governance risk profile. “These two dimensions, financial and extra-financial, will become increasingly inseparable. One example is Volkswagen’s environmental scandal in 2015 which lowered its share price. Our ESG analysts underlined the unfavorable gap between the company’s environmental performance and its poor governance practices. The combination of financial and ESG performance will form the new recipe for successful development and growth,” Jacky Prudhomme says.