From Social Impact Bonds (SIB) in Great Britain and Europe, to the new Social Impact Contracts...
How effective is Socially Responsible Investing (SRI)?
First conceived in the 1930s, Socially Responsible Investing (SRI) remained a marginal niche market for many years. But investors have lately begun to demand more responsible investment options to support the most ethical companies. The French Financial Markets Authority (AMF) drives more standardization in SRI practices alongside the French government who recently created an SRI Label to encourage this type of investing. The initiative will provide more information to investors, while serving as a guarantee of the SRI practices enacted by funds bearing the label.
Looking beyond financial criteria
For investors, SRI means considering “extra-financial” criteria when making investment choices: these include Environmental, Social and Governance (ESG) criteria.
Taking this approach responds to two objectives:
• For some investors, accounting for ESG risks makes it possible to ensure stronger long-term financial performance, while extra-financial criteria help to detect new growth opportunities and minimize exposure to certain image and financial risks.
• For others, SRI is a tool for privileging companies that respect the values that are important to them (for example, by privileging businesses that responsibly manage ESG concerns in their supply chains).
SRI in every variety
SRI now applies to a vast range of funds offered by banking and insurance networks, with investments in shares, bonds and securities:
• Issued by companies or governments meeting a fixed set of ESG criteria
• Excluding businesses that do not respect international standards and conventions (in matters of environmental protection, human rights, labor rights, etc. For example, companies that have not signed the United Nations Global Compact are excluded)
• Excluding certain business sectors (tobacco, weapons, gambling, GMOs, nuclear, etc.)
• Responding to a specific challenge (renewable energies, climate change, health, etc.)
An official label, at long last
However, a clear definition of SRI is still needed. The AMF published a report at the end of 2015 in which it describes SRI as a heterogeneous and polymorphous concept which lacks transparency. In 74 of the 100 SRI funds it studied, the AMF deplored a lack of information that leaves investors unable to “understand what it means in practice when a product has SRI in its name”. Worse yet, 21 of these funds simply state that “there is a responsible investment policy” but do not provide any further explanation.
Nevertheless, the AMF also underlined the efforts and best practices of certain management companies, so the criticism does not extend across the entire SRI market!
And more clarity should come this year as the French government has announced the creation of an official “SRI Label”. The decree establishing the label was published in the government’s Journal Officiel in Janaury 2016. Until now, SRI labels have remained a strictly private initiative (Novethic SRI Label, the CIES Label).
Growing success, proven returns
The new label will boost investor confidence and should promote more socially responsible investing, an area that is seeing strong demand. In fact, according to the annual Novethic survey, socially responsible investing (SRI) products are growing rapidly: they reached €222.9 billion in 2014, growing by 31% from 2013.
But in 2014, total SRI products held by retail investors (especially through employee savings plans or life insurance policies) reached €40.9 billion (or 18% of the market), compared with €182 billion held by institutional investors.
Driving the success of these products is a desire on the part of investors to leverage financial and extra-financial value creation, notably in an effort to carry out a social mission in the case of French retirement and pension funds, without sacrificing performance. Several reports have already compared the performance of responsible investment funds with traditional funds. The results prove that taking ESG criteria into account helps generate returns similar to conventional investment tools.
Our social responsibility is rooted in 3 principles: promoting diversity and inclusion;...