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SRIs: Force for good or fashionable chimera?
The pandemic, and the attendant financial crisis, was a trial-by-fire for Socially Responsible Investment: It passed with flying colors. Now everyone wants a piece of the pie.
Every cloud has a silver lining, it seems. And, with politicians promising ‘generational engagement’ the old adage can be applied to Socially Responsible Investment (SRI) in the age of the virus. Last spring, as the world went into lockdown, markets from New York to Tokyo suffered precipitous drops: the CAC 40 was down 38%, the S&P 500 fell 36%, as did Dow Jones and the MSCI Emerging Markets Index saw 34% of its value wiped out.
While things stabilized as spring rolled on, these unprecedented figures underline the severity of the crisis. Eyes quickly turned to SRIs to see if their much-touted resilience turned out to be true.
A crash-test for SRIs
The results were impressive. “On average, since the start of the year SRI indexes outperformed their more established counterparts by 4.5%,” states Olfa Mallej, a board member of investment bank Neuflize OBC. This figure, while not spectacular, at least points to the durability of SRIs in the face of the Covid-19 pandemic.
A study by Fidelity International confirmed as much, when it published a list of the highest-rated companies in terms of environmental, social and corporate governance (ESG) criteria. Companies with a lower score underperformed the market in February and March of 2020. The American investment management services company found that, between February 19th and March 26th of last year, the best-rated groups in terms of ESG (those receiving an ‘A’ score) outperformed the S&P 500 by an average of 3.8%, while the worst (those receiving an ‘E’ score) underperformed the stock-market index by 7.4%.
This would seem to bolster the arguments of proponents of this form of investment, who have long maintained that their products are resistant to the vagaries of the market, even major ones like last spring. SRIs have passed their first crash-test with flying colors.
Vindicated by their performance during the pandemic, the heavyweights in the asset management sector wasted no time in increasing their ESG investment output. This was the case with Neuflize OBC, for example – a company already heavily engaged in this area – which recorded growth of 30% in the SRIs it managed in 2019.
"Vindicated by their performance during the pandemic, the heavyweights in the asset management sector wasted no time in increasing their ESG investment output"
“Covid has been an important catalyst. In our discussions with clients over wealth management, it’s clear that responsible investment has become a priority for them,” notes Valerie Spies, the company’s director of clientele. These days, Neuflize OBC prioritizes offering SRI management to all its clients. Family offices, the advisors of choice to old money, have for the most part, adopted the same position.
A BlackRock survey, published on January 14th, found that, “Family offices no longer consider making a sustainable investment as sacrificing returns,” adds Sheryl Needham, the multinational investment management company’s managing partner.
Another interesting indicator of how SRIs are currently valued in the investment community is the explosion in the number of SRI certifications: there are now over 650 recognized SRI labels covering over €230 billion in investments at last count.
SRI certification: a work in progress
While there is now a collective understanding among funds of the need to make their products greener, the spectre of greenwashing persists and companies and governments have recognized the need to do more.
In order to encourage the uptake of SRI initiatives, governments have carried out numerous reforms. In France, the Pacte Law makes it a requirement for insurance companies to offer clients life-insurance contracts from funds that have secured a SRI certification.
However, the SRI certification itself has been subject to increased scrutiny of late. Critics cite the “lack of transparency and clarity over what an SRI certificate does and doesn’t guarantee,” states Alexis Masse, president of the Forum for Responsible Investment, whose organization is putting its weight behind a new SRI certification, which will enter into force on October 23rd.
This is a welcome development, but it doesn’t go far enough. The French economy minister, Bruno le Maire, has already announced an investigation by the financial watchdog, “in order to accurately examine the label and the organization which provides it. The results will inform the roadmap for SRI certification in France for years to come,” stated Le Maire. The French government clearly wants to insure that, in the future, only those companies worthy of an SRI certification, receive one.
The choice of a new generation
A backdrop to this mobilization of officialdom has been a grassroots movement that has contributed to the increasing popularity of SRIs: youth engagement. Millennials are almost systematically investing in a more ethical way than previous generations.
As far back as 2015, a Morgan Stanly report found that 89% of investors aged 25-39 paid close attention to ESG criteria before making a decision to invest. This trend has continued in the intervening years. Young savers are not shy about sharing their convictions with investment professionals in their own age group. “The next generation of family office members will have a much greater interest in sustainable investment, and will put pressure on funds to reflect their values and ethics when they make investments on their behalf,” adds Sheryl Needham.
It’s a safe bet that the pandemic will only sharpen the resolve of the younger generation, and make those in the investment community at large sit up and take notice.
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