Socially responsible investments in France has soared with an 11%* increase from 2017 to 2018! At a time when the future of our society is faced with major challenges, this new approach of finance raises a key question: can investments combine performance objectives with sustainable development principles? Here is a look at some answers.
Socially responsible investment (SRI) consists of taking non-financial evaluation criteria into account when deciding on investments. “We also call them the ESG criteria: E for environmental, S for social and G for governance. In practice, we look at the impact a company has on its environment, its social practices, particularly regarding employees, how it treats and communicates with shareholders...” said Olivier Héreil, Deputy Chief Executive Officer of Asset management at BNP Paribas Cardif.
France – the chosen land of SRI
The approach was created about thirty years ago mainly by religious congregations seeking to align their investments with their beliefs (for example, refusing to invest in companies that manufacture weapons or alcohol). With the surge in concerns linked to sustainable development, the movement grew to become a general trend in asset management. At the end of 2017, SRI represented nearly 5,000 billion euros in global assets, of which over 1,000 billion came from the French market alone **. “Our country was a historic breeding ground for these types of investments, especially with the heavy involvement of social partners and public institutions that drove the market forward. As a result, France was at the forefront in this area and is very active at the European level, whereas SRI remains a niche market in the United States and is just emerging in Asia,” said Antoine de Salins, Associate Director of I-Care & Consult, that supports public and private organisations in achieving their environmental transition.
SRI takes various forms. Managers can choose to exclude some companies from their asset portfolios, such as those that produce electricity from coal and thus contribute to the acceleration of global warming. They can also invest in the most advanced companies according to ESG criteria. This “best in class” approach culminates when we include in portfolios companies that are given the highest scores by non-financial agencies and that also innovate to find solutions to sustainable development issues. Lastly, there is the thematic approach. These are funds focused on topics linked to environmental protection and social issues, such as producing green energy, fighting poverty and promoting fair trade.
A virtuous loop
In all cases, SRI creates a “virtuous loop”. “It brings financial assistance to companies committed to addressing major issues that affect society as a whole. They can therefore mobilise greater means and resources to develop their activities and, consequently, their positive social impacts. Investors, for their part, give meaning to their investments, which they are more and more interested in doing,” said Olivier Héreil. Of course, the offer is still fairly recent and very diversified, which may hinder market growth due to the difficulty in understanding it (in a 2018 IFOP survey, only 8% of respondents said they knew what SRI was, as opposed to 22% who knew about participatory financing). However, two developments should help to clear this obstacle. Firstly, efforts can be made in training and communicating with distribution networks to help them commercialize the proposed solutions. Secondly, labels are increasingly numerous and rigorous. In France, two of these exist: the SRI and CET (Climate and Energy Transition) labels. Launched in 2016 with support of public authorities, they aim at offering greater visibility of SRI products to savers. They guarantee that their management addresses strict specifications, which call especially for clear and transparent information.
Less risk, same performance
If SRI is winning people over, it is not because it is ethical but because it is both ethical and profitable. Risk reduction is its major asset. “A company is not only about financial statements: it is also a human community. If we stick solely to financial criteria to evaluate its quality, we are in for some unpleasant surprises. Not paying attention to governance quality, for example, can be costly to the investor”, said Antoine de Salins. Moreover, most of the academic research on the topic over the last few years has led to the same conclusion: SRI does not reduce performance but can even out-perform traditional investments on the long-term and reduce risks.
Insurers – the key market players
Insurance companies play a key role in the development of SRI. They are actually long-term institutional investors. Yet, as Olivier Héreil recalls, “SRI brings its value over time.” That’s why life insurance is one of the best-suited financial products for this type of investment. “What’s more, insurers are now being pressed to develop responsible finance by central banks and financial regulators who have entered the game with a heavy hand.” In France, the public authorities are also inciting insurers. Following the law on energy transition in 2015 inviting insurers to include ESG criteria in their investments, the PACTE law, adopted in April 2019, requires that they propose a product with SRI labelled fund in their contracts from the year 2020.
BNP Paribas Cardif – a responsible insurer
This promising context should strengthen BNP Paribas Cardif’s historic involvement for the SRI. Such involvement is closely linked to the company’s mission to make insurance accessible to the largest possible number of people while being useful to society. It is based on one conviction, summarised by Olivier Héreil: “As an institutional investor, we have the dual responsibility of managing our policyholders’ savings by combining financial performance with a positive impact on society.” The company has been working towards this for the past ten years by deploying a global approach. It selects all of its investments by integrating ESG criteria. Since 2015, it has also financed over a dozen projects on renewable energy development through the Tera Neva green bond, and has invested in a real estate project in 2017 aimed at creating emergency accommodations for people in highly precarious situations.
Saving by being useful
At the same time, BNP Paribas Cardif gives its customers the opportunity to invest directly in SRI products, via unit-linked in particular. The company was even a pioneer in this area with the launch in 2008 of its first socially and environmentally themed funds eligible in life insurance contracts. Its range has since become much broader. Currently, in the BNP Paribas Aqua fund for example, clients contribute to strengthen access to good quality water by financing supply, treatment and sanitation facilities. With the Sycomore Happy@Work fund, they invest in European companies that are particularly careful about managing their human resources. “There are now rankings of companies considered to be great places to work and we realise that there is a link between happy employees and a company’s performance” said Olivier Héreil. This is added proof, if any were needed, that sustainability and profitability go hand in hand.
* Source: Novethic
** Source: the French Asset Management Association