IN PRINT ARCHIVE CIR Summer 2008
By Christophe Vandewiele, vice-president, Dexia Asset Management, Canada
In the context of a worldwide financial crisis, environmental, social and governance (ESG) issues are becoming increasingly important in the framework of investment decision-making process. Previously, Socially Responsible Investment (SRI) was solely defined as an investment strategy based on the exclusion of certain controversial activities involving companies selling tobacco, alcohol, or weapons. Today, SRI is understood more broadly and involves both exclusion and inclusion.
SRI is also defined differently across different countries. In some countries, SRI is understood mainly as the integration of ESG criteria into the traditional investment decision-making process in order to optimize the risk-return ratio of an investment. In other countries, SRI also includes the screening of companies for positive characteristics such as environmental leadership, or negative aspects, such as human rights abuses. In Japan, where SRI is relatively new, almost all SRI screenings are positive ones.
At present, SRI is subject to several approaches:
Today, more than 230 institutional investors from 30 countries around the world (representing USD 10 trillion) have backed the Principles for Responsible Investment (PRI). The European SRI market (which grew by 36% between 2003 and 2007) is valued at $ 1.5 trillion and accounts for 15% of the total European funds (Eurosif). In the U.S., SRI totals $2.6 trillion, which represents 9% of the total of assets under management. In Canada, SRI grew nearly eightfold between 2004 and 2007 due to a shift of public pension plans towards SRI investment management. This trend is expected to continue in the future because of rising awareness and institutional investor’s interest.
Recently, SRI funds have been established in emerging markets countries. In those countries, SRI has de facto impacted several asset classes and has still an enormous growth potential.
SRI and performance
The market place today is becoming increasingly aware of the fact that the so-called extra-financial criteria (ESG factors) can enhance financial performance over time. There is a misconception that has to be demystified: investing in accordance with ESG criteria translates automatically into underperformance. It still bears the stigma of its largely exclusionary past. Major studies have demonstrated no sign that SRI investment compromises return in the long run.
SRI is an investment philosophy, which makes good business sense, because long-term economic growth cannot be achieved without respect for all stakeholders. The interaction between a company and its stakeholders is a source of risks and opportunities which have an impact on the company’s market valuation in the long run. Using the so-called extra financial criteria therefore, means that a best in class SRI strategy will select the companies with the most attractive risks/opportunities profile and then enhance financial results.
SRI investment started with equity class. Today there is a trend towards other asset classes or more thematic funds and climate change funds. Several tendencies have also been noticed like segmented SRI mandate, ESG criteria overlay, emerging markets SRI funds, real estate, and 130/30.
In conclusion, SRI is not exclusively about exclusion. On the contrary: although SRI has recently undergone significant growth due to public awareness and increasing transparency, it is not hype. Rather, it is a lasting and growing trend that does not compromise returns but could enhance them in the long run.