A beginner’s guide to responsible investing

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Sustainable development, or the concept of economic development that meets the needs of the present without compromising the needs of future generations, came into being following an initiative taken by the United Nations (UN) in the 1980s. At the time the UN was seeking to address concerns about the deterioration of the human environment and natural resources. The scope of the term ‘sustainable development’ has always integrated the objectives of economic development, social development and environmental protection.

The idea that the only way to successfully achieve economic and social progress is by linking them to environmental protection – was set out as one of the principles of the Rio Declaration on Environment and Development in 1992:

“In order to achieve sustainable development, environmental protection shall constitute an integral part of the development process and cannot be considered in isolation from it”

Great progress has been made since with widespread commitment to adopt and implement national strategies for sustainable development. Nonetheless the world’s ecosystems, which are fundamental to economic development and to life in general, continue to deteriorate. While there has been considerable progress toward reducing poverty, it remains a huge problem in many regions of the world.

Socially responsible investing (SRI) integrates sustainable development into asset management

BNP Paribas Asset Management is committed to the principle that by taking sustainable development into consideration in our decision making about investments, we as an asset owner can have a significant impact on sustained economic prosperity. The central premise of sustainable development is that environmental degradation undermines or limits economic development, social well-being, and security.

In asset management, SRI is the application of sustainable investment to financial investments. It is a form of investing that, while targeting competitive financial performance, takes into account environmental, social and governance (ESG) criteria in assessing and selecting assets.

Policy initiatives that guide our approach to responsible investing

In 2000 the Global Compact, a strategic private-public policy initiative for businesses committed to sustainable development was launched. Long-term value-creation is widely understood to include a commitment to the ten principles of the Global Compact, offering a framework for development, implementation and disclosure of sustainability principles and practices related to human rights, labour, the environment and anti-corruption. The businesses supporting the Global Compact initiative must also submit annually a Communication of Progress describing the company’s efforts to implement the ten principles.

Focusing specifically on institutional investors, the Principles for Responsible Investment of six voluntary standards for investors aimed at incorporating ESG issues into mainstream investment decision making and ownership practices. These principles were the result of a growing recognition by investment professionals that ESG issues can affect the performance of investment portfolios. It offers a framework for investors to enable them to appropriately consider ESG issues in fulfilling our fiduciary duty, thereby improving long term returns to our clients.

The preamble to the PRI states:

“As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that ESG issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time). We also recognise that applying these Principles may better align investors with broader objectives of society.”

The Carbon Disclosure Project (CDP), initiated in 2006, has as its goal to motivate investors, corporations, and governments to “prevent dangerous climate change” by collecting and distributing information on what actions these entities have taken to address climate change. The first step is to measure the emissions, then manage and reduce them. The CDP is the largest corporate GHG emissions database in the world, providing a detailed analysis of how the largest multinationals are responding to climate change.

In 2017 thirteen leading international asset owners and five asset managers, including BNP Paribas Asset Management, launched the Transition Pathway Initiative (TPI) to better understand how the transition to a low-carbon economy affects their investments. The TPI will assess how individual companies are positioning themselves for the transition to a low- carbon economy through a public, transparent online tool. In doing so, our objective is to send a clear message to companies regarding our expectations of them as they position themselves for the transition to a low-carbon economy.

Applying ESG or ‘extra-financial’ criteria to our investments

ESG criteria are used to evaluate the qualities of a corporation. The scope of these criteria goes beyond the framework of conventional financial analysis and covers the following areas:

Environmental criteria: The direct or indirect impact a company’s operations have on the environment (greenhouse gas emissions, energy efficiency, industrial accident prevention, water resource management, waste management, etc.).

Social criteria: The impact of a company’s operations on its employees, customers, suppliers and civil society with reference to universal values (human rights, international labour standards, anti-corruption, etc.).

Corporate governance: Covers the way in which a company is managed, administered and controlled. With a particular focus on the relations it maintains with its shareholders, board of directors and management team.Our approach to Socially Responsible Investing covers two main approaches: thematic funds and generalist funds

How our commitment to responsible investing translates into investing

Our approach to Socially Responsible Investing covers two main approaches: thematic funds and generalist funds.

Thematic funds

These are funds aiming to invest in businesses our research teams consider will have a major social and/or environmental impact.

Environmental themes include energy saving, renewable energies, water management and pollution control, waste treatment and recycling.

Social themes include the war on poverty, health protection, education, fair trade, goods and services dedicated to disadvantaged populations.

These also include microfinance funds invested in organisations whose role is to lend limited sums of money to small business owners who are generally unable to access conventional sources of financing, as well as support for social entrepreneurs whose goal is to sell products and services that improve the living conditions of disadvantaged populations and/or protect the environment.

To qualify as eligible for the thematic funds, we require that a company generates a significant proportion of their revenues (typically between 20% to 50%) from the targeted activities.

Multi-sector or ‘best-in-class‘ funds

Additionally, SRI funds also often have special features related to specific investments or income redistribution.

Funds whose holdings are selected only from companies within a given sector of business activity, that apply best practices with regard to employee relations (e.g. job creation, human resources management,) and the environment (e.g. efforts to prevent climate change, energy savings, environmental protection), and comply with corporate governance principles (e.g. independence of the board of directors, respect for shareholders’ rights).

Solidarity funds

These funds invest between 5% and 10% of their assets in solidarity-based companies or economic solidarity projects recognized as such in terms of their legal status (e.g. social inclusion aid, social housing, etc.).

Sharing funds

These are funds that pay at least 25% of the income generated by growth in the fund to charitable organisations. They correspond to a solidarity-based approach.

Written on 26 May 2017

The investments in the funds are subject to market fluctuations and the risks inherent in investments in securities. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay, the fund described being in risk of capital loss.

Andrew C. Craig

Head of Financial Market Analysis & Publications

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