Insidecrypto helps you (re)discover Socially Responsible Investments (SRI) in all of its facets. Criteria, labels, weight, performance, and available investment supports. Before you start learning about responsible finance, you should know everything there is to know.
Responsible finance is about ensuring stock selection is based on financial and other financial criteria. These criteria can be grouped into three categories, which are listed under the name
Sustainable finance is about awareness
Responsible finance was born in an environment that recognized the imminent depletion of natural resources, the need for reducing the impact of human activity on the environment, and the increasing importance of concepts of well-being, balance, and sustainability. These observations led to the creation of sustainable development in 1990.
Sustainable development can be defined as “a form of sustainable growth that meets the current needs without compromising the ability for future generations to meet their own.” This quote is a quotation from Gro Harlem Brundtland (the Norwegian Prime Minister who presided over the Earth Summit in Rio in 1992).
Sustainable development can only be understood in a broad view that considers three important dimensions: the economic in its strictest sense, the ecological, and the social dimension.
These international texts define the goals of solidarity and responsible financing
This idea has been adapted by the investment and management professions to meet the needs of their sector. They offer a sustainable form of investment. They rely heavily on the United Nations’ sustainable developments goals. This is responsible finance. Even though the environmental aspect is not mentioned in the name, it is an important pillar and often found in the majority of investments, especially in Germany. It is represented by the E in the abbreviation ESG. Again, this is where international texts are helpful in determining the right course.
What are the ESG criteria ( Environment and Social Governance)?
Management companies that offer SRI funds to their clients usually exclude controversial sectors like gambling, tobacco, arms, and fossil fuels. Companies that are based in tax havens to reduce their tax burden are also exempt. Management companies can avoid more or less all tax havens.
Finally, the ESG criteria are in play. Finance professionals have created three types of stock selection criteria that can be used to ensure responsible finance investments. They call them ESG.
“The following criteria are included under the umbrella of environment: energy consumption, greenhouse gases emissions, water management, and so on”.
Criteria for the social/societal pillar include customer/supplier relations and safety.
Governance also includes criteria regarding remuneration, shareholders rights, and integration of ESG criteria.
Each management entity decides what criteria it wants to include in its extra financial analysis grid. These criteria can also vary from one sector or asset class to the next.
We have therefore decided to include a variety of criteria in our analysis
Management companies often work with companies that specialize in ESG criteria evaluation, such as Vigeo-eiris, a subsidiary Moody’s. This allows them to consider all of these criteria as well as other factors. Companies can also create their own analytical framework to replace or supplement external analyses. They can conduct their own audit, and some, like La Financiere de l’Echiquier, will systematically meet with a company’s managers before including it in an SRI-labeled funds.
Responsible finance labels: SRI (TEEC), Finansol, and other
There are many labels that can be used to identify responsible investments and assure the committed and ethical nature of these investments. Most well-known is the SRI (for Socially Responsible Investor).
Michel Sapin launched the SRI label in 2016 to encourage responsible investment among individual investors. It guarantees that any investment labeled meets ESG (for Environment, Society, Governance) criteria. At the time of its creation, the Minister of Economy and Finance stated that it “promotes SRI legibility among investors and gives meaning to this theme.” The label requires applicants to show “measurable results”. They are required to show that their SRI management has eliminated certain potential investments from their portfolios based on environmental or social criteria.
A new standard for SRI labels was created on July 23, 2020. It went into effect on October 23, 2021. Bercy states that the specifications of the label were subject to several changes, which aimed to improve transparency and monitor ESG performance, expand its scope by making professional funds, mandates as well as the real-estate investment sector, eligible for the label. This is enough to give this label new life. It is already well-received by institutions and, perhaps more timidly, the general public.
Other less-known, but equally interesting labels followed suit.
- The Greenfin Label (ex-TEEC Ecological and Energy Transition For Climate) is for the financing of the ecological transformation. It excludes investments financing companies in the nuclear or fossil fuel sectors. It is for investment funds that finance the ecological transition and the green economic.
- Finansol label was created in 1997 to group solidarity savings investments and finance activities with strong social and/or environment utility.
- The CIES label, for Comite Intersyndicale de l’Epargne Salariale, groups together employee savings plans that incorporate ESG criteria in their management.
These labels are provided by rating agencies like Vigeo, Ethibel, and even MSCI. They notably produce SRI analysis, which they sell managers who want to complete their own analysis, or to benefit from an outside expertise.
We could also mention , the UN label. developed the UN PRI (United Nations Principles for Responsible Investment), in 2006, and its signatories agree to the following principles:
- ESG issues should be considered in investment decision-making.
- ESG issues should be considered in shareholder policies and practices.
- Ask companies to publish reports on ESG practices for the companies in which these investments are made.
- Encourage asset managers to accept and implement PRIs;
- Partner with financial sector actors who have signed up to the PRI in order to improve their effectiveness
- Report on their activities and progress in implementing PRIs.
Although these United Nations Principles for Responsible Investment are more than 10 years old they still appeal to management companies such as Banque de Luxembourg Investments which joined in April 2018.
These labels can be applied to companies, but not just companies. Companies are not the only ones that are subject to extra-financial analyses. To determine if they are responsible and reliable debt issuers, states are also examined. Responsible finance, and SRI in particular is not just about equities, but also about bonds, real estate, and other financial instruments. The new label should cover more of these areas.
How to get the SRI label
A fund must first undergo a fund labeling audit by one of the three organizations accredited by COFRAC. This parapublic organization ensures the quality and integrity of labelers. This audit is based on the composition and nature of the portfolio to verify that the eligibility criteria for SRI label are met.
If these criteria are met, the next step is to verify by the certification body whether the fund meets the labeling requirements via analysis of regulatory documents and the portfolio statement, as well as interviews conducted with fund managers. The goal is to verify compliance to the following 6 labeling criteria.
- The fund seeks to achieve the following objectives:
- The methodology used to analyze and rate ESG criteria by companies in which the fund invests.
- ESG criteria are taken into account when building and maintaining the portfolio.
- The ESG engagement policy (voting and dialog) with companies in which the fund invests
- Transparency in the fund’s management
- The measurement of the positive effects of ESG management on the development and maintenance of a sustainable economy.
Only then can the SRI label be awarded. The fund is then registered on the official list of Ministry of Economy and Finance, which lists all funds that are socially responsible investments.
What is the performance of SRI and responsible financing?
Since the beginning, there has been a question about how SRI performs in comparison to traditional funds.
Is SRI a high- or low-performer? Although it is difficult to compare all products that claim this label it is now accepted that extra-financial criteria reduces risks (reputational and regulatory, etc.). While this does not compromise performance, it is quite the opposite.
SRI aims to reduce the risk that underperformance occurs
Incorporating extra-financial criteria in stock analysis and selection is a way to identify more potential risks to protect against them. A company that considers all of these criteria is less likely to experience the associated risks, which is an asset for investors.
It is important to note that companies that are mindful of how they use their resources and build good relationships with their employees and suppliers are more likely to grow. Financial interests are not necessarily incompatible with good intentions.
How profitable is SRI
It is absurd to ask about the profitability of SRI funds. Socially responsible investment funds are numerous and have a variable return depending on their market, the type of assets they invest in, the sector they are in, the geographic area they are in, etc. It is better to compare what is comparable, and to then compare the performance of an SRI funds with one that is not. As we have seen, ESG criteria are an outperformance factor.
This is illustrated in a UNEP-FI study entitled “Demystifying Responsible Investment Performance” published in October 2007 in collaboration with the Mercer company.
Management companies that offer SRI funds have been able since then to compare the performance of responsible investing with traditional investment. All agree that SRI is superior. One example is the evolution and comparison of the Ecofi SRI Index to its benchmark index. It is worth noting that companies who are open to ESG criteria are the most resilient during times of crisis.
Responsible finance: What are the challenges and opportunities for sustainable financing?
The future of responsible finance is bright. It attracts investors and sees its outstandings grow at the same time that new labels are being made. But we must not forget the challenges that sustainable finance can present. Although sustainable finance is receiving increasing support, it is still not fully reflected in the numbers. It is necessary to educate French people about this type of investment. An IFOP survey was conducted between August 22 and 26, 2022 for French Forum for Responsible Investment. It found that “65%” of French people had never heard of SRI and that “nearly 90%” of French people have never invested into an SRI fund. This shows that there is still plenty of room for socially responsible investing.
There is also a problem of opaqueness with multiple labels and criteria that don’t help investors find their way through responsible finance. This creates confusion and leads to suspicions of greenwashing that are more or less well-founded but that undermine the ethical nature of these investments. Pictet Asset Management is a pioneer in the area of thematic funds. It offers a variety of funds with the SRI designation. Pictet Asset Management is realistic and pragmatic about the situation.
“Fund managers are using a wealth of marketing and ingenuity to convince investors that their investment strategies will be whiter, but also greener, and more social. They do not all dedicate the same resources to ESG management. They don’t all have the same requirements or the same evaluation grids,
Herve Thiard (Managing Director Pictet Asset Management France), stated in a press release in April 2021. The “sustainable finance disclosure regulation (SFDR) is changing the situation. This European text defines three main types of responsible funds: article 6, article 8 and article 9. These funds are focused on companies with the highest environmental or social quality, and article 9, which funds show the desire to have an actual impact on the social or environmental spheres.
Investing in SRI or responsible finance: Which investments should you choose?
A wide range of investments make it possible to invest in responsible finance. The number of investments available is growing.
Solidarity, responsible savings products, and bank passbooks
One of the responsible finance labels is displayed on some bank passbooks. Mutualist banks specialize in this area and offer clients savings solutions that include sharing. The interest earned on the Credit Cooperatif Agir passbook, for example, is split between the passbook holder as well as a partner association.
Investing in a fund that is specialized and has an SRI label
The best way to invest in responsible finance is to invest in a specialized fund that has one of the above-mentioned labels. This type of investment is possible because funds lend themselves to it. Managers are increasingly interested in taking extra financial criteria into consideration. Is it not the responsibility of the investor to find sustainable profitable investments?
The investment horizon
An equity fund’s average investment horizon is 5 years. However, the supports that these funds are housed in have a much longer lifespan which fits well with a long-term and sustainable vision of investing.
With the Finansol label, invest in a euro fund
Be aware that not only the UCITS-type investment funds can be considered sustainable finance. This is also true for certain capital-guaranteed euros funds. Responsible finance does not have to be limited to the units of your life insurance contract. Responsible finance can also be done from the euro fund of a policy in life insurance. In 2020, Finansol was awarded to the euro fund of MAIF’s Responsible and Solidarity Life Insurance Contract.
Green bonds: Invest in socially responsible bonds
You can also invest in sustainable finance via the bond market. Greens bonds, also known as obligations vertes, are debt securities that can be issued by companies, international organisations, local authorities, or even states to finance projects or activities with environmental benefits. After years of record growth, this segment of socially responsible investments stabilized in 2022. This is due to stricter regulations and rising energy prices, which tend to push renewable energy support into the background.
Exchanged Traded Funds SRI: Investing in a socially responsible ETF
You can now invest in ETFs that are SRI-labeled. These index funds are issued by banks and investment companies such as Lyxor and BlackRock. They replicate the performance of stock indices (baskets of stocks) that take into consideration the famous ESG criteria. ETFs make it simple and affordable to invest in companies that meet the highest environmental, social, and governance standards.
Investing in socially responsible real property
SRI-labeled funds are primarily equity funds. However, the number of SRI real estate funds is increasing rapidly. These SRI real property funds are primarily focused on environmental criteria for energy performance, but also on criteria for social use of buildings.
Structured products for investors who want to be more responsible
Structured products can be used to invest in responsible finance. In 2018, Societe Generale provided a structured product with a charitable component to retail investors: Cristal Solidarite. This was the first structured product offered in private banks. The product was recalled on July 12, 2021 because the underlying asset had closed at a level higher than the one that was observed at its launch. Cristal Solidarite generated over EUR680 000 in donations for French associations on the topics of children, health, and humanitarian emergencies (EUR170000 at launch, EUR510 000 conditional donations).
Investing in responsible financing: directly, via life assurance, a Per or a PerECO?
These funds and structured products can be invested directly or via the units in a life insurance contract or via a company saving plan (PEE), a collective company retirement savings program (PERECO), or via retirement savings plans (PER).
The retirement savings market took advantage of the October 2019 PER revamp to give it a facelift. It now offers many responsible options, such as access to SRI-labeled funds and an ESG-driven management option. This is where financial criteria are taken into consideration. PEEs are proving to be a popular option for sustainable finance.
It is now possible to make employee profit sharing dependent on company finances as well as its performance against ESG goals.
Responsible finance investment should be easier in the future. The Pact law requires that at least one support be proposed with a label of SRI or solidarity on a life insurance contract.
You can also invest in responsible financing by directly investing in companies in this sector, such as companies that are positioned on alternative energy sources or companies in the social and solidarity sector. Crowdlending is another option to help these companies by lending money through a participatory financing platform.
Some questions about SRI?
What is SRI?
SRI (Socially Responsible Investing) is a method of selecting stocks based on financial criteria. It also includes extra-financial criteria such as governance, environmental, and social. It is about applying the concept sustainable development to finance.
What are the benefits of investing in SRI investment?
Sustainable finance is about giving meaning to your savings, and investing in companies or projects that make sense. It can also be a way to increase the return on your portfolio, as the extra-financial criteria for SRI are an outperformance factor, as numerous studies have shown.
How do you invest in SRI?
Sustainable finance is available on many investment supports, making socially-responsible investment affordable for everyone. Bank passbook, as well as investment funds, structured products and live securities, all offer ways to bet upon this sustainable, virtuous investment. Unit-linked life insurance policies must now include at minimum one SRI-labeled funds.
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