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#SRI — 10.01.2018

THE IMPORTANCE OF SRI AND HOW IT ADDS VALUE TO INVESTORS

Kanol Pal - Head of SRI, Asia

Doing well by doing good has emerged to become a virtue in investments. No wonder the marriage of "business", "ethics" and "investment" continues to gain support from investors.

Concepts such as SRI and ESG might appear fashionable and the important next steps in the evolution of socially responsible investing strategies. But how exactly do they translate into action and go beyond mere lip service? 

What is SRI? 

Sustainable, Responsible, Impact (SRI) investing is an investment approach that integrates ESG factors in the investment process.  This process can apply to all asset classes: equity, bond and private equity, just to name a few. 

SRI invests in companies with a sustainable business plan and the objective to generate long term competitive financial returns as well as contributing to a positive societal impact. 

What is ESG? 

E stands for Environment.  E factors include climate change, air pollution, water use and waste recycling. 

S is for Social.  S factors include labour rights, health and safety, supply chain standards, customer right protection. 

G is for Governance.  G factors include corporate governance, business ethics, bribery and corruption, executive pay. 

The relative importance of ESG factors depend on the country, industry and company.

Industry

ESG factors

Financial

Governance

Oil & Gas

Environment

Emerging Markets

Social factors linked to labour rights, health and safety protection of workers

Different SRI strategies 

Negative screening excludes investing in industries such as tobacco, alcohol and defense. 

Norms screening excludes investing in companies which are not compliant with international norms (UN Global Compact, International Labour Organisation).

Integration combines traditional financial analysis with the explicit consideration of ESG factors (extra financial analysis [1]). 

Engagement policy aims to influence corporate behavior to change positively by the use of shareholder power, such as via communicating with management, filing resolutions for more transparency, disclosure and proxy voting. 

In SRI selection , we at BNP Paribas Wealth Management [2], also use engagement policy to communicate our opinion to the asset manager on the strong and weak points of their ESG process.  This would encourage further improvement, e.g. to strengthen their exclusion policy on some negative sectors. 

Impact Investing are investments made into companies with the definite intention to generate social and environmental impact alongside a financial return.  There is a commitment to measure and report social and environmental performance to ensure transparency and accountability. 

Example of social impact reporting are the number of jobs created, the increase of income among the farmers, the number of young people for higher education, the number of women becoming micro entrepreneurs.

Measurement and reporting of impact are now linked to the 17 UN Sustainable Development Goals.

Why SRI is important? 

SRI investing has become an important asset class with a 25% growth between 2014 and 2016.  The asset under management (AuM) in SRI has reached USD23 trillion in 2016 (30% of global AuM)[3].

It will continue to grow as more and more institutional investors and asset managers will adopt ESG in their investment decision process. 

The smart money [4] in US and Europe are already allocating to this space with 52% of all investable assets in Europe and 22% in the US are managed with either a sustainable, responsible, or impact investing style [5]. 

On the demand side, 70% of worldwide wealth will be in the hands of women and millennials (USD65 trillion) by 2025 and both groups prefer a purpose and impact-led investments, in addition to financial return [6]. 

In the academic field, the traditional framework of analyzing investments using the 2 dimensions of risk and return will evolve to 3 dimensions: risk, return and impact.

Source: BNP Paribas Wealth Management - Impact Driven Solutions - Aug 2017

Does SRI investing add value? 

The financial performance of SRI investing is usually equivalent or above that of traditional investments, according to a 2015 research comparing more than 2,000 studies on the relationship between ESG criteria and the financial performance of investments [7]. 

Intuitively, the integration of ESG factors into investment analysis helps select good quality companies with sustainable business.  It also contributes to minimise risks as ESG failures can be costly to investors which are well documented in recent cases in industries such as oil exploration automobile or finance. 

The outperformance of SRI investing over traditional investing is even more significant in emerging markets (EM) versus developed markets as EM companies are improving their ESG scores. 

The BNP Paribas story 

Sustainability is a key element of BNP Paribas Group 2020 Business Development Plan.

  • We are committed to playing a major role in the transition towards a low carbon economy.  We target to be carbon neutral as soon as possible by increasing the amount of financing devoted to renewable energies to €15 billion in 2020 (x2 vs 2015) and invest in innovative start-ups that contribute to accelerate energy transition
  • Part of our electricity supply will be switched to renewable sources
  • We target not to finance companies or infrastructures whose principal activity is gas/oil from shale or oil from tar sands or oil/gas exploration or production projects in the Arctic region.  We continue to contribute to achieving UN Sustainable Development Goals through our loans to corporates and our range of investment products
  • BNP Paribas Wealth Management also has an ambitious objective, targeting to double the AuM invested in SRI from €10 billion to €20 billion by 2020

Realizing the full potential of SRI investing depends on the availability of information about impact investing and accessibility to these opportunities.  Although Asia currently trails behind Europe, North America in SRI growth, without doubt, the market and appetite for such strategies is expanding. 

SRI investing is no longer just fashionable but is instrumental in helping to bridge the yawning gap and transforms individual investor to be a better steward of the environment and contributor to the community in which we live.

1 i.e Systematic assessment of corporate governance, environmental and social responsibility – BNP Paribas at the UN EP Financial Initiative, 2004

2 BNP Paribas Wealth Management (BNPP WM) is the business line name for the wealth management activity conducted by BNP Paribas

3 Global Sustainable Investment Alliance 2016 Review

4  i.e Cash invested or wagered by those considered to be experienced, well-informed, “in-the-know” or all three – Investopedia as of 1/8/2018

5 Global Sustainable Investment Alliance 2016 Review

6 BNP Paribas Wealth Management  – Impact Driven Solutions – Aug 2017

7 Source : Gunnar Friede, Timo Busch & Alexander Bassen, ESG and financial performance: aggregated evidence from more than 2000 empirical studies, Journal of Sustainable Finance & Investment (2015)