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Sustainable Investments - New investment solutions

Alice Martinou

Following the adoption of the 2016 Paris agreement on climate change, the United Nations 2030 Agenda for Sustainable Development, and the current EU Commission’s Action Plan: on ‘Financing Sustainable Growth’, sustainable and responsible investments (SRI) (1) have become a clear focus for the financial industry.

According to the EU commission, sustainable finance has 3 main goals: foster transparency in financial and economic activity; assess and manage relevant financial risks stemming from climate change, resource depletion, environmental degradation and social issues; and reorient capital flows to achieve sustainable and inclusive growth. 

Investments with real impact?

In order to make sure that this capital is allocated to sustainable activities, dedicated analysts have been developing Environmental, Social and Governance (ESG) criteria since the early 1990s in order to assess companies on these aspects and inspire new investment strategies that aim at delivering positive societal impact. However, since there is still no norm on ESG criteria, the European Commission recently gathered an expert group who released its 1st report this year on June 18th, specifically dedicated to identify environmentally sustainable economic activities. This work is a fundamental milestone that will help avoid the risk of greenwashing in sustainable finance.

What about performance?

Regarding performance, a large majority of academic and business studies found no evidence that restricting the investment universe with SRI restrictions does necessarily worsen the risk-return trade-off (A). We see however a growing consensus that environmental, social, and governance (ESG) factors have a measurable positive effect on corporate financial performance of companies. Some studies also show a lower company specific risk when those score high in terms of ESG ratings (B). Indeed, the market reaction in case of negative newsflow on  ESG factors being particularly strong and often lasting.  We thus see a case in the current more risky environment to switch investment solutions to more defensive ones. Investment funds with a best-in-class (2) approach and those investing for example in defensive long term themes such as the food supply chain are a typical example especially when they invest in food-related sectors using strict and committed sustainability criteria (ie. excluding palm oil producers or first generation ethanol producers for instance).

Solutions that meet your responsible investment needs

At BNP Paribas Wealth Management, we are pleased to make it possible for you to integrate these new opportunities within your portfolio, whether you have a Discretionary Management or Advisory contract with us.

In order to start better understanding your expectations in this domain, please get in touch with your Private Banker or your Investment Advisor.

(A) See for example G. Friede, T. Busch and A. Bassen (2015) or O’Brien, Liao and Campagna (2017).

(B) This risk reduction features of ESG has also been documented by Lee and Faff (2009).

 

(1) SRI:

SRI is an acronym that is associated with traditional assets (listed equities, bonds, funds). It is used when the instruments’ selection process systematically integrates ESG analysis. It encompasses various sustainable investment strategies like sustainable multi-sector or sustainable thematic approaches. Several national labels exist to assess SRI funds. BNP Paribas WM has its own internal rating methodologies, relying mostly on external frameworks, to assess the sustainability level of these types of assets.

 

(2) Best-in-class:

Best-in-class funds or funds implementing a sustainable multi-sector approach:

The sustainable multisector approach is a type of ESG stock picking consisting in preferring companies with the best sustainability rating within their business sector, without  favouring or excluding a sector relative to the market index used as an initial reference.