Background on Socially Responsible Investment (SRI)

Socially Responsible Investment

ESG selection

It relies on selecting or overweighting issuers in portfolio with best environmental, social and governance (ESG) practices.

Norm-based exclusions

Exclusion of issuers violating internationally recognised norms or conventions, such as the UN Global Compact principles which encompass the universal declaration of human rights, the International Labour Organization's declaration on fundamental principles and rights at work, the Rio declaration on environment and development and the United Nations convention against corruption.

Shareholder engagement

Shareholder engagement refers to investors' stance on ESG issues, requiring that the companies in which they invest improve their practices. These requirements take the form of a structured approach based on direct dialogue with the company and long-term monitoring. Investors can use different pressure tactics if the dialogue approach does not prove effective: public disclosure on the progress of the engagement approach and the company's failings on extra-financial issues, impact on management that may go from a freeze to divestment or the exercise of shareholder rights, i.e. questions in general meetings, voting against proposed resolutions, support or filing of external resolutions.

Sector-based exclusions

Exclusion of companies deriving a significant part of their revenue from activities deemed harmful for society. It generally refers to ethical exclusions of sectors such as alcohol, tobacco, arms, gambling and pornography, or exclusions for environmental issues in cases of GMOs, nuclear energy, etc.

Thematic funds

The ESG thematic approach consists in choosing companies active in sectors or themes related to sustainable development such as renewable energies, water, health, or more generally climate change, eco-efficiency, aging, etc. Companies can be eligible if their revenue derived from selected activities is above a certain threshold, or if they are leaders on said market.

The ESG thematic or sector approach can be applied to the whole portfolio or limited to a percentage of the total assets. It can also lead, when combined with ESG selection, to overweighting the environmental or social dimension in company ratings.

According to Novethic, both sector-based and thematic strategies cannot, alone, qualify as SRI, since issuers are not analysed based on their ESG practices. To be qualified as SRI management, these activity-based strategies have to be combined with systematic practice-based approaches such as ESG selection, norm-based exclusions or engagement.

Ethical funds

First used to refer to sector-based exclusions funds, the term is now often used to designate all SRI funds, including funds based on ESG selection process.

The French SRI market in 2010

According to Novethic's 2010 Annual Study of the French SRI Market, total assets under SRI management owned by French clients reached EUR 68.3 billion, representing a 35% increase between the end of 2009 and the end of 2010. This robust growth stems mostly from the conversion of large existing funds to SRI and buoyant employee savings, despite the relatively challenging context for asset management.

ESG screening practices, in most cases best-in-class, which consists in selecting the leading companies from each industry group based on ESG criteria, remain the dominant approach in France.
More information on SRI in France

SRI mutual funds

Today, around 60 asset management companies (both French and foreign) offer roughly 300 SRI mutual funds on the French market. Seven asset management firms manage more than two billion euros each through SRI mutual funds at end 2010: Natixis Asset Management, Amundi, BNP Paribas Investment Partners, Allianz Global Investors, Edmond de Rothschild Asset Management, Dexia Asset Management and Groupe OFI.

ESG integration vs SRI

In the field of responsible finance, we usually distinguish between the most advanced approaches, classified as SRI, and those where ESG issues are taken into account progressively but not systematically, namely ESG integration. In the case of SRI, these issues are articulated in a structured way with the management and have an effective and measurable impact on the portfolio. Integration reflects rather an assimilation of ESG issues by managers and financial analysts on case-by-case basis. Despite its sustained growth, SRI remains a niche market that represents a few percentage points of the overall financial management, while ESG integration has expanded in recent years to several thousand billion Euros.

ESG integration and SRI become closer

Among financial institutions surveyed by Novethic, ESG integration strategies have become more and more structured over the years. ESG integration practices include the diffusion of extra-financial information to non-SRI teams, ex post ESG rating, the introduction of ESG rating in companies financial rating, target stock price or credit rating, etc.
More information on ESG integration

Core SRI and Broad SRI

Every two years, Eurosif, the European Sustainable Investment Forum, publishes its European SRI Study which reveal trends and figures on the SRI markets in Europe. Eurosif distinguishes two SRI markets:

• "Core SRI" is composed of the following strategies (with possible combinations):
  • Norms- and values/ethical-based exclusions (three or more criteria);
  • Positive screening, including Best-in-Class and SRI thematic funds.
• "Broad SRI" is composed of the following strategies:
  • Simple screening (one or two exclusion criteria, norms-based or values/ethical based);
  • Engagement;
  • Integration.

More information about Eurosif

The European SRI market in 2010

Acording to the last Eurosif study, Core SRI assets under management accounted for €1.2 trillion as at December 31, 2009, up by 20% in two years, and Broad SRI assets for €3.8 trillion. In terms of market share, Eurosif estimates that Core SRI assets represent 10% of total assets under management in Europe.
Download the European SRI Study 2010

SRI in the United States

The SRI market in the United States often emerges as a model of development. SRI dates back to an earlier period: the first American SRI fund, Pax World Fund, was created as early as 1971, about 10 years before the first French SRI fund. Also, the size of the market is theoretically more important: 12% of assets are managed through a socially responsible approach, while that proportion is about 4% in France. However, we must put this in perspective since the US definition of SRI is broader.

The US Social Investment Forum has identified three types of SRI approaches in the United States:

1. Screening - Consists in selecting companies based on ESG criteria. Positive screening entails rating the company on a number of ESG issues, while negative screening applies exclusionary criteria which ultimately determine whether the company will be retained or not. For example, all companies that derive more than 5 percent of their revenues from the weapons industry will be excluded from the investment universe.
2. Shareholder advocacy - Consists in engaging with the companies in which one invests, and to propose or support resolutions at Annual General Assemblies (AGMs) in order to bring about more responsible practices.
3. Community investment - Investment which seeks to create wealth in economically deprived or under-developed areas either in the United States or in developing countries.

More information on SRI in the United States

SRI in Canada

SRI is a concept that emerged in Canada in the 1980s. Originally based on the exclusion of a number of sectors, it now encompasses different approaches, such as shareholder activism, the integration of SRI criteria and the selection of companies well rated on these issues. Two dominant SRI areas have arisen in Canada: community investment and capital risk linked to sustainable development.
More information on SRI in Canada

Asia is an area where SRI is growing, although its expansion greatly varies from country to country. Corporate governance and environmental issues are the dominant themes. An ethical dimension through negative screening is burgeoning in countries where Islamic Finance is taking place.
More information on SRI in Asia