What is SRI?

SRI consists in taking into account of environmental, social and governance (ESG)* criteria, in addition to conventional financial criteria, in the process for stock picking and portfolios construction. With its long-term view, SRI is the financial expression of sustainable development.

*ESG: Environmental, social and governance criteria are used to evaluate Corporate Social Responsibility. For example, the environmental area includes energy efficiency, water consumption, and the environmental impact of products and services. The social dimension includes career development, training, employability and non-discrimination. And governance includes the balance of corporate power and the performance of the board of directors, the effectiveness of the audit and other oversight functions and anti-money-laundering efforts.

In France, sustainability criteria are used in two principal approaches:

"Best-in-class" or positive selection favours companies that have the best ESG ratings within each economic sector. In the automotive industry, for example, the best-in-class approach favours companies positioned in the manufacture of cleaner, hybrid and electric vehicles.

The exclusion approach eliminates those companies whose business is deemed to be contrary to moral values or to have a negative impact on society, such as tobacco, alcohol or weaponry. This approach might also exclude companies that do not adhere to the standards of the United Nations Global Compact regarding labour rights, human rights, preventing corruption and environmental protection.

Sustainable development funds match ESG criteria with financial criteria to select the top-performing companies in terms of sustainable development. Among these funds are best-in-class funds and thematic funds.

Ethical funds (exclusion policy) exclude business sectors such as tobacco, alcohol, gaming or weapons. This approach, initiated by religious groups in the early 20th century, enables investors to avoid companies whose objectives or methods they consider reprehensible.

Profit-sharing funds invest chiefly in fixed-income or money market products. Investors give up part or all of their investment income, which is paid to a charity or a humanitarian organisation. In return, they receive a tax break.

Communities & Social Business funds invest up to 10% of their assets in companies that help develop the local or regional economy, foster social integration or extend microcredit through projects financed by associations such as Association pour le Droit à l'Initiative Économique (ADIE) and Société d'Investissement France Active (SIFA).

Socially responsible employee savings funds: accredited by CIES (a committee consisting of four out France’s five main trade unions), these funds are managed in accordance with financial and non-financial criteria that take into account the extent to which the company adheres to fundamental standards as defined by the International Labour Organization.

Shareholder engagement: this means that funds will engage in direct dialogue with companies and exercise their voting rights as shareholders to demand that the companies adhere to stricter standards of social responsibility.

An SRI approach not only looks at the traditional criteria of financial returns; it also analyses a company's ability to respond to ESG issues...

An SRI approach not only looks at the traditional criteria of financial returns; it also analyses a company's ability to respond to ESG issues, verifying that its strategy contributes to its long-term viability and development. A company that treats its employees well is more likely to attract and retain talents. Similarly, sound management of environmental issues improves the company's relationship with the local community and enhances risk management.

SRI is the way to play an active role in the economy while remaining a responsible shareholder.

With the advent of SRI, financial investment has returned to fundamentals. During this period of crisis, which has reveal a lack of transparency in certain financial investments, SRI makes the entire investment process traceable, from sustainability analysis and research to portfolio construction. For this reason, it has attracted growing interest, not only from institutionals but also from retail investors, who are increasingly sensitive to sustainable development issues.

SRI and its long-term investment horizon first caught on with institutional investors and pension funds. By nature, pension funds have to abide by prudential requirements and are therefore careful to select high quality assets and to promote the general interest through the way in which they invest.

Pension funds in northern Europe adopted this approach long ago. The Norwegian Petroleum Fund, for example, was a bold innovator in the area of ethical investment. In France, the trail has been blazed by the national pension reserve fund (FFR) and the complementary pension funds (ERAFP) for the civil service, and AGIRC and ARRCO for the private sector). Institutional investors dominate the best-in-class market in equities and fixed-income securities.

SRI is also suitable for individual investors seeking clear responses to their quest for commitment to sustainable development. The customers of retail and private banks are particularly drawn to sustainable development's thematic funds, which often reflect current events, to community funds, which enable them to make a direct commitment by financing projects, and to ethical funds for their simplicity and transparency. These funds are invested either in equities or fixed-income securities and some are eligible for inclusion in French equity savings plans (PEAs).

SRI funds are also accessible to employees through various types of company savings plans. Since 2002, several product lines have been accredited by CIES, which has developed its own analytical standards. These take into account the manner in which sustainability criteria – particularly those related to labour law – are integrated into the asset management process.