Can we believe that 80% of AuM are more or less driven by RI strategies?
How sincere and effective are the efforts to implement a responsible investment (RI) attitude? Is it only greenwashing of old unchanged habits? As we claim at AG2R LA MONDIALE, to have approximately 100% of AuM under a Responsible Investment umbrella, I will first address the question in our own case, before moving on to the subject of the industry in general.
All depends on the degree of expectation: does a responsible investment policy consist in introducing non-financial criteria into asset management (i.e. an obligation of means)? Or does it aim to produce highly virtuous portfolios from an ESG (Environmental, Social and Governance) standpoint (i.e. obligation of results)?
AG2R LA MONDIALE has approximately 100 billion euros of AuM1:
- of which we claim almost 100% falls within the framework of our RI policy;
- of which €10 bn is invested in long established inhouse Sustainable and Responsible Investment (SRI) funds that comply with a high ESG rating.
The difference between RI and SRI is just one letter, S, but this does not mean that RI has forgotten to be “social”: rather it indicates that RI is not supposed to be as Selective as SRI funds are. If it were still possible, it would be nice to rebrand the acronym SRI as “Selective Responsible Investment” (obligations of results), which would usefully pair with RI (obligation of means) to cover the full spectrum of possible policies.
Our RI policy is thus primarily an obligation of means. We established, ahead of the implementation of the French law on the Energy Transition, an in-house policy to use extra-financial considerations in our investment process and to contribute to the general goals of sustainable development. Our woes were renewed in March 2018, when the company signed the PRI, as an asset owner, engaging all our AuM, not merely the assets within our Asset Management company. This obligation of means, often referred to as “integration of ESG”, may be difficult to quantify or to illustrate by tangible evidence, but it is a genuine day-to-day practice, starting with the traditional “morning meeting”, where the ESG analysts will intervene, alongside with other analysts and fund managers – all the fund managers, not just the SRI specialists. All managers have access to the company’s proprietary ESG database. Issuers of bonds and equity are given a notation, based on a broad range of ESG criteria. The credit analysts also incorporate these ESG grades in their own assessment, as does the country risk analysis. Integration of ESG goes two steps beyond the mere information process. It also includes a set of sector exclusions (most controversial weapons, tobacco and coal) and an active voting policy in AGMs – similar to the one deployed for our SRI funds.
Turning to these SRI funds, they were historically our first RI step in the early 2000s. They are managed with a classic best in class approach, where issuers are first selected on the basis of their ESG grades: they must be at, or above, the median sector note. Then comes the financial selection. This gives a high degree of selectivity, since approximately 50% of the investment universe is excluded. This also ensures that the funds do not exclude one or another ESG aspect – especially important at a time when Environmental issues are tending to take a prominent position: let’s not forget the Social or Governance challenges. The selectivity can be seen as tangible proof or engagement, action taken as an investor. It is suitable to external auditing and to labelling – and we have welcomed the creation of a Public SRI Label in France. It can significantly help reduce suspicions that ESG may only be greenwashing. It will force asset managers to be more transparent and consistent in their processes. However, selectivity means exclusion: how much of the global economy is it suitable or politically acceptable to exclude from fund access: energy? transport? mining? banking? The best in class approach partially addresses this issue by maintaining a position for all sectors (bar some very limited exclusions: tobacco, coal…). Still, the best in class approach excludes half of the company. Therefore, by definition it cannot be extended to 100% of the investment universe. So SRI funds can spearhead the RI investment approach, be the prime sting to stimulate ESG laggards. But it is difficult to see them conquering 100% of AuM.
Hopefully the distinction established here between RI and SRI may tend to become more blurred in the future.
- The criteria for good results of an RI policy may progressively be calculated in absolute terms, rather than in relative terms, as it is today in best in class methods. For that, we need progress toward more standardised and measurable ESG characteristics of companies and states.
- ESG malpractice may tend to be progressively outlawed so that the investment universe becomes more and more compatible with sustainable development – and the real world with it.
1 AG2R La Mondiale Website. 2018 financial report. www.ag2rlamondiale.fr/investors/financial-results
Chief Economist and Head of Responsible Investment - AG2R LA MONDIALE
Philippe started his career with the French Treasury, as a delegate for monetary policy and then for the supervision of publicly-owned companies in the Energy Sector. He has also managed international teams of economists and financial analysts at Credit Lyonnais, ABN AMRO, Fortis and Euler Hermes. Philippe graduated from Ecole Normale Supérieure and is a professor in social and economic sciences.