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Socially Responsible Investment : choosing the right strategy to meet your objectives
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- 29.06.2018
With a 25.2% growth worldwide between 2014 and 2016, Socially Responsible Investment (SRI) has witnessed sharp growth. To support the more ethical organizations in their activities while ensuring a profitable return on their investments, investors may choose between these two types of funds in line with their objectives—thematic funds or multisector funds (“best-in-class” funds). Béatrice Verger, Head of SRI Development and Promotion at BNP Paribas Asset Management, explains more.
What actions has BNP Paribas Asset Management taken in terms of responsible products and services?
BNP Paribas Asset Management has been developing its expertise in SRI since 1997, and now offers a wide range of socially responsible funds. This range consists of funds invested in money market instruments, bonds and equities. It also offers diversified funds. These funds had total assets under management of nearly €35 billion at end-December 2017 (source: BNP Paribas Asset Management).
This expertise is implemented by more than 50 employees, and is the result of a shared philosophy and close cooperation between our various affiliates:
Could you tell us one or two typical BNP Paribas funds for each approach: thematic, best in class and possibly other approaches, if they are established at BNP Paribas ?
Thematic Approach, e.g. BNP Paribas AQUA
BNP Paribas AQUA is an international equity fund invested in the water sector. It comprises 50-60 companies that generate at least 20% of their revenues in one of the following areas: water treatment, saving and recycling technologies; installation, maintenance and renovation of water supply networks, waste water sanitation services and decontamination. In addition, this fund applies a filter intended to ensure the companies comply with the principles of the United Nations Global Pact and BNP Paribas Group’s sector policies in its investment process.
As of 31/12/2017, the fund’s assets under management totalled €2,829 million.
Best In Class Approach, e.g. BNP Paribas Sustainable Bond Euro Short Term
BNP Paribas Sustainable Bond Euro Short Term invests according to a Socially Responsible Investment (SRI) approach in investment grade bonds issued by companies or public entities (governments, agencies, etc.) in the eurozone or on eurozone markets. The SRI approach is intended to promote best Environmental, Social and Governance (ESG) practices among the issuers, as assessed by our ESG research team. The fund thus targets companies and public entities that set themselves apart in their sector of activity, not only because of their attractive valuations, but also through their responsible behaviour and contribution to sustainable development. In addition, this fund applies a filter intended to ensure the companies comply with the principles of the United Nations Global Pact and the BNP Paribas Group’s financing and investment policies in its investment process.
As of 31/12/2017, the fund’s assets under management totalled €1,472 million.
Social investment, e.g. BNP Paribas Social Business France
BNP Paribas Social Business France is a “90/10” fund that invests 90% according to a diversified and flexible SRI approach. It may invest up to 100% of its net assets in equities and bonds, via funds or directly.
The remaining 10% is invested in socially-responsible companies based in France. Through these investments, the fund provides financing to local companies with a social and/or environmental mission in the following areas:
- combating exclusion (employment of people in need, access to necessary products and services for everyone, access to culture and education, etc.),
- social innovation in health (caring techniques for the elderly, intergenerational housing to address the issue of dependence, innovative products to help the disabled, etc.),
- the environment (local farming, renewable energy, recycling and sorting of waste, etc.)
As of 31/12/2017, the fund’s assets under management totalled €104 million.
How do the thematic and Best in Class approaches manage to reconcile returns and ethics? How do they differ in this?
Socially responsible investment (SRI) funds were little known to the public a few years ago, but are now extremely popular in both institutional and private European investors’ portfolios.
Against the backdrop of a growing consciousness of the environmental and human challenges of the 20th century (climate change, water-related issues, the ageing population, urbanisation, etc.), these funds respond to the growing desire among investors to grow their capital while giving their savings a broader meaning, in return for a risk of capital loss: they select companies that incorporate environmental protection, a social dimension and good governance in their growth strategy. SRI is thus the application of the sustainable development concept to financial investments. It is a form of investment that, while seeking financial performance, aims to generate added social and/or environmental value. To do this, SRI management systematically incorporates ESG criteria in its valuations of companies in order to select those that obtain the highest scores.
Investing in SRI funds is therefore intended to create value, not only for investor savings and for society as a whole.
these funds respond to the growing desire among investors to grow their capital.they select companies that incorporate environmental protection, a social dimension and good governance in their growth strategy.
Environmental impact
Direct or indirect impact of the company’s activity on the environment (greenhouse gas emissions, prevention of industrial accidents, management of water resources, waste management, etc.)
Social impact
Impact of the company’s activity on its employees, clients, suppliers and on the community, in relation to universal values such as human rights, international labour standards and the fight against corruption.
Governance
The way in which the company is directed, managed and controlled; the relations it has with its shareholders, its board of directors and its management.
Why are there two major approaches in SRI?
- "Best In Class” or "multi-sector” management
They are intended to favour companies that demonstrate greater social and environmental responsibility (combating climate change, respect for human resources, etc.), and which comply with corporate governance principles (independence of the board of directors, respecting shareholders’ rights, etc.).
These principles are adapted to all other categories of issuers (sovereign, supranational institutions, etc.) in the bond and money market management framework.
Issuer selection is based on proprietary research conducted by our dedicated team of non-financial analysts.
- “Thematic” management
Thematic management invests in a targeted manner in activities, products and services relating to the protection of the environment and/or social well-being. Because they provide concrete solutions to sustainable development, these activities can potentially offer attractive growth rates compared with the rest of the economy.
What other types of approach are there and what are their specific features?
Incorporation of ESG criteria : In addition to SRI (Socially Responsible Investment) funds, BNP Paribas Asset Management takes into account Environmental, Social and Governance (ESG) criteria in all investment decisions and in its whole range of open-ended funds without exception (in particular index funds that replicate an index).
For all its investments, BNP Paribas Asset Management thus applies ESG exclusions funded on the ten principles of the United Nations Global Compact (Legislative Exclusion)
In addition to the principles of the United Nations Global Conduct, BNP Paribas Asset Management applies specific ESG standards that companies operating within certain sensitive sectors must comply with in terms of social and environmental impact. They are defined in financing and investment policies.
What conditions need to be met to acquire the SRI label and how is this label a measure of quality?
This label is intended to boost the visibility of SRI management among investors by enabling them to easily identify investments that incorporate Environmental, Social and Governance (ESG) criteria in their investment policy.
An SRI-labelled fund must thus meet numerous requirements: transparency for investors (objectives, analyses, processes, inventories, etc.), portfolio selection based on proven ESG criteria, coherent voting and engagement policy, etc.
BNP Paribas Asset Management is developing a range of SRI funds in equities, introducing the responsible dividend concept. How is this concept an innovation?
It provides active management based on systematic and disciplined stock selection that combines non-financial research, financial research and quantitative analysis. The investment universe consists of equities offering a high and responsible dividend, i.e. one resulting from non-controversial activities, after analysis of issuers’ ESG practices, and one that does not jeopardise their future growth.
The securities must meet the following criteria:
- A dividend policy that does not jeopardise the company’s investment capacity (exclusion of companies that finance dividends through debt or reserves.)
- ”Balanced” allocation of results generated by the company, progressively taking into account factors relating to the allocation between shareholders, employees and reserves.
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