Responsible Investment, a market that is becoming more mature each year!
Responsible investment, although highly acclaimed by investors, reveals the signs of a growth crisis, linked to major transformation problems.
We can therefore justifiably ask why all these good intentions and this hard work are failing to hit the mark with public opinion and investors. Is insufficient communication about the rapid development of SRI offers a satisfying answer to this question? Or is it simply an excuse to avoid confronting a more complex problem in its analysis and search for solutions?
All the signs of a growth crisis
Without calling into question the sincerity of the sustainable investment policies adopted by asset managers or underestimating the results obtained, the fact is that today there are various signs that there is a certain growth crisis in the sustainable and responsible investment sector:
- The existence of a large number of concepts (green investment, ethical investment, norm-based exclusions, global compact, responsible investment principles, sustainable investment, socially responsible investment, sustainable development goals, etc.) is creating some confusion, sometimes even within informed communities;
- The use of various types of selection processes (Bestin- Universe, Best-in-Class, leaders, Thematic, Carbon focus) adds ambiguity;
- Developped methodologies, whether proprietary or open source, do not clearly specify their field of application or their granularity (is it a local impact, a more global impact, from design to recycling? as the Financial Times indicated in November 2017, a Tesla vehicle produces more CO2 than a mid-range car for a typical user in the American Midwest over its total life cycle);
- And thus, a lack of shared methodology and acknowledged measuring instruments. Indeed, under these conditions, how can we assess the true nature of the most convincing efforts undertaken when there are limited benchmarking possibilities? How can we show the progress made when the instruments do not provide an indisputable measurement of models’ speed of transformation? And therefore how can we expect retail clients, who do not have the means of critical analysis that institutional clients do, to form an opinion from all these sales pitches?
- A proliferation of labels that cover various shades of green, many of them based on self-certification…
- Outrageous communication regarding certain products that claim to be “green” when it’s often just greenwashing.
Investors’ expectations regarding performance are very disparate, thus leading to a growing sense of confusion. Some investors, for example, look for higher yields in technologies or emerging fields that have a perceived higher risk, such as a project for a factory that captures ambient CO2. Other investors are happy with lower yields via the financing of more mature technologies, such as a ground-based wind farm project. Investors too frequently compare these yields to those obtained via traditional investments over a similar timeframe. The Norges Bank example is emblematic in this respect: at the end of 2018 the Norwegian government, the bank’s majority shareholder, decided to review its green asset investment policy because ethical management, which consists in excluding certain sectors and groups from a portfolio, was weighing on performance1.
This is not an exhaustive list; there are many more examples we could mention that justify these difficulties, often legitimate, fueling this sense of growth crisis.
Solutions to move forward
In view of these observations, which may appear severe, numerous initiatives have been launched to address these often unavoidable difficulties regarding these vast issues that are environmental and societal transformations as well as the fight against global warming.
Strategies for incorporating ESG criteria require clear methodologies that are more sophisticated than the “exclusion” method widely used when SRI was first launched. Some asset managers have therefore defined their own methodology and are able to justify and explain their investment choices.
Methodologies need to be based on reliable and verifiable data across the broadest possible scopes. Data suppliers have understood that they can play a key role in this new data market. A consolidation trend is emerging within this specialised market with, for example, the acquisition of Oekom by ISS or that of Vigeo by Moody’s… and it is clear that American data suppliers have built up substantial market share.
Public initiatives and market authorities are taking part in this process, pursuing the incentivising and normative efforts they have already put into making responsible investment more appealing and measurable. At European level, the conclusions of the TEG/HLEG groups notably aimed at defining Taxonomy are eagerly awaited. However, the most sophisticated analysts are asking for flexibility, notably on the environmental side where all the effects and causes are not sufficiently known.
It is everyone’s responsibility to find the appropriate solutions to move forward with the implementation of an efficient SRI model. In any case it is certain that one of the key factors for success will involve the right balance between private initiatives and those implemented by regulators and lawmakers.
So, all in all, this is an immense objective that may appear unachievable to our impatient contemporaries. It also represents an amazing project for generations seeking challenges. And it is the necessary condition to restore mutual trust between investors and asset managers. Is this the real answer to this crisis?
This article is the conclusion of a series of articles on the topic of RSI, written by a large panel of experts:click here to read our Responsible Investment Magazine (in English)
(1) Since 2014, the stock market portfolios. of companies that incorporate environment aspects provided an average annual yield of 6.2%, compared with 10.6% for stock market portfolios in general. (internet link).
Head of Strategy - SGSS
Etienne Deniau started working in 1990 at Fimat, the Futures and Options brokerage arm of Societe Generale, for which he ran the Tokyo office from 1993 to 1997. He then moved to London to head Societe Generale’s local branch for Global Banking and Securities Services. In early 2000, he left the Societe Generale group to pursue different opportunities in retail banking. He returned to Societe Generale in October 2004 and has held the following positions:
Head of Client Strategic Marketing - SGSS
After various experiences at Altus Finance, KPMG and ABN AMRO, Laurent joined SGSS in 2006 where he held the position of Head of Custody and Trustee Services for France and then Head of Client Services for SGSS. Laurent graduated from École Supérieure de Gestion and HEC Paris (EMBA).