In the present context of an economic and financial crisis, the Kyoto Protocol, the French “Grenelle de l’environnement” and stimulus plans have placed socially responsible investments and the topic of sustainable development to the forefront of the scene.
The conceptual framework: from a quantitative to a qualitative approach
The concept of sustainable development is “a development that meets the needs of the current generation without undermining the ability of future generations to meet their own needs” (Brundtland Report - 1987 United Nations Commission).
“Socially responsible investments cover all approaches that consist in integrating extra-financial criteria in investment and portfolio management decisions.”
An imperative need to clarify the standards
The heterogeneous practices relating to socially responsible investments raise the issue of legibility and transparency for investors. However, regardless of the selection or constitution methods, socially responsible funds target the same profitability as traditional funds. The establishment of “standards” which allows to compare data and constitutes a communication tool, is crucial and a coherence guarantee.
Extra-financial analysis: establishing a new scale of values
Transposed to finance and the corporate world, sustainable development initially meant evaluating the performance of companies via an extra-financial analysis that complements a classic, fundamental analysis. This “parallel” analysis is made under three specific points of view:
- Environmental – analysis of the impact of a company and its products on ecosystems, in particular the consumption of resources, the production of waste and polluting emissions.
- Social – analysis of the company’s business and its social impact, including working conditions, non-discrimination and the respect of local cultures and communities.
- Corporate governance – analysis of the contribution of a company to the economic development of the area around it and compliance with fair competition principles (board of directors’ practices, transparency, corruption), among other things.
Extra-financial notations consist in having a specialized agency (referred to as a rating agency) assign a rating, which evaluates the social and environmental responsibility of the company. The objective is to support investments in companies that demonstrate the greatest performance over the long term.
Emergence of a separate class of assets - a recent evolution
Many funds based on these analytical criteria (ESG) have been constituted over the past few years and have led to the creation of the most common investment instruments. Their rapid expansion was helped by the emergence of rating agencies to evaluate these criteria. In parallel, funds specifically focusing on areas related to sustainable development have been recently launched. Environmental funds, in particular, do not just invest in the companies with the highest agency rating, but more specifically in companies directly involved in environmental issues and their resolution. In particular, these include “green funds” specialized in water, waste processing, renewable energies, wood and “clean” technologies.
The sustainable development approach is based on a crucial need to make our economy compatible with the natural resources available. This is a fundamental but insufficient condition to face the energy and climate challenges of the future. However, will this major increase in awareness of investors lead to a change in our behaviour and our mentalities on a daily basis?
