The fact that the first forms of socially responsible investment (SRI), already seen in the United States in the 17th century, originated from religion explains the almost automatic association between SRI and exclusions. The relationship between ethics and money has always raised many questions that have led to the avoidance of activities relating to weaponry, alcohol, slavery, tobacco, gambling, etc. However, now, the aim of incorporating environmental, social and governance (ESG) factors as well as sustainable and responsible investments is to move beyond this rather negative approach which is based on the (reputational) risk of investments. There are positive approaches too.
Driven by a number of international initiatives –in particular the United Nations Principles for Responsible Investment (PRI)– the incorporation of environmental, social and governance (ESG) factors is experiencing significant growth. Expertise is growing and becoming more professional. The PRI initiative currently has over 2000 signatories and accounts for almost USD 45 trillion under management. They are therefore an important lever for dialogue and moving towards more sustainable finance.
Alongside the worldwide growing importance of sustainability in recent years, there is a structural trend that is here to stay. On the one hand authorities joined in, eager to make it a standardized, systematic and much more widely adapted approach. We will focus on that evolution in our second module. On the other hand, economic or financial crises have raised awareness and investors are paying close attention to any factors that may create volatility and uncertainty surrounding their investments. Moreover, thanks to social networks, their investments are monitored continually by the different stakeholders involved, whether they are the beneficiaries of pension funds, clients, trade unions, employees or the civilian population. Hence, reputational risk reaches its full significance.
To meet this growing demand, supply has also grown and become more mature over the past decade. Its complexity and the lack of a universal definition are often confusing for investors. What makes a strategy sustainable and responsible? While the European Commission is working on a taxonomy, the international organisation Eurosif has identified seven approaches, used separately or together, that are increasingly recognised as standard methods by users. We have identified the advantages and disadvantages of each of them, as well as their potential impact on the universe, so that investors can rely on these methods to identify what approach(es) best meet their needs and profile.
Sustainable and responsible investment is not restricted to merely exclusions, since such a limitation is considered an obstacle to the sound diversification of investments, and therefore a potential cost of performance. Quite the opposite even! Today, the use of different instruments and methodologies not only helps to protect against a certain level of reputational risk, but also to make better-informed and well-founded investment decisions and therefore to optimise the risk and return profile. That approach benefits from tools and methods that were largely developed over the last two decades, incorporating environmental, social and governance factors. While the availability and quality of ESG data are often questioned, they have improved significantly in recent years and will continue to do so, driven by various regulatory initiatives, in particular the Directive on non-financial information, which came into effect last year.
The investment horizon remains an issue and, in particular, the ongoing debate on short-term pressure and the desire to realise long-term investments. A regulation enabling institutional investors to make genuinely long-term choices would be a huge step forward. Whereas private investors bear a certain responsibility in the decision-making process.
With the structural trend of incorporating ESG factors into management and the subject gaining maturity and being further standardised and systematised, the niche that sustainable and responsible investments have been until recently, is becoming an expertise in its own right (“mainstream”) and is gaining ground. As a potential source of added value in terms of optimising the risk return, but also in terms of the ESG impact, which is increasingly seen but is still difficult to assess, sustainable and responsible investment is based on a more open and global reflection of investment that is not limited to out-and-out exclusion.
Dialogue, commitment and integration approaches are also part of the map of so-called positive approach options.
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