The COP21 being held in Paris from the end of November through mid-December may boost SRI investments if agreement is reached.
Most environmental experts claim COP21 forms the “last chance” to prevent the planet from edging into further disaster by reaching a global agreement on issues such as carbon emissions to limit global warming to two degrees as from 2020.
BNP Paribas Investment Partners’ head of Sustainability Research Helena Viñes Fiestas remains confident in an agreement that should be legally binding and that will “give countries, firms and investors a clearer idea of where they have to get to in their intentions to reduce their greenhouse gas emissions.”
But, she says “the devil is in the detail.”
“What type of agreement? How far will it go? The question deals with governments’ targets to reduce their greenhouse emissions and how to assess how appropriate and ambitious they are.”
“How to track progress? How to sanction breaches and revisit targets to achieve a two degree scenario? We will have to look at the process that is going to be implemented. The final text should describe the process of review of national climate targets set, we believe, every five years. This is a critical point to a successful COP deal,” she says.
The COP21 may also be considered a significant opportunity for the SRI market to really take off.
In France alone, French research centre Novethic has assessed SRI strategies accounted for €223bn of assets invested in 2014, with an 82% share of institutional investors. Assets invested in strategies applying ESG criteria last year amounted to €356bn.
Novethic’s report revealed a best in class approach, favouring the best rated companies in their sectors on the basis of ESG criteria, was applied to 90% of French SRI assets.
The SRI bucket will grow as the law setting up the energy transition in France obliges local institutional investors to disclose their carbon footprint and to explain how their investment process is in line with global and local climate targets.
From the buy side, SRI has already made its way into institutions’ selection processes, with pension funds and some boutiques having established SRI/ESG criteria as a buy list fundamental in addition to traditional quantitative and qualitative filters.
“We seek managers applying a fully committed and robust SRI approach to their process. We analyse which means are implemented for ESG research, and how this research served the asset manager’s investment and idea generator process,” says Edmond Schaff (pictured), head of Fund Selection and Asset Allocation at Cedrus AM.
“We also favour managers who are thoroughly convicted by SRI, as we think appointing SRI reluctant managers to manage SRI portfolios could harm fund performance.
“Lastly we expect asset managers to be transparent and to reach their extra financial performance especially through reporting,” he adds.
Schaff expects more funds focusing on themes like carbon and the financing of the energy transition to be launched following the COP21.
He also stresses initiatives around decarbonisation increase at a fast pace with institutions developing SRI approaches and carbon’s financial risks, such as stranded assets, being better understood.
Schaff assesses the SRI momentum is already built and believes it will speed up in the aftermath of the COP21. Assets managers will have to adapt their offer to new investors’ needs.
In his view, “a positive outcome of the conference may play the role of performance catalyst on stock exchange markets for companies involved for instance in renewable energies or fuel efficiency.”
One challenge is that on the retail side demand. Demand seems not to be there yet, according to a recent poll of French investors carried out by institute Ipsos for Eiris and Frenchsif.
Some 1,100 French individuals, of which 950 are investors, were polled. The results reveal that more than two thirds of French individuals have never heard of socially responsible investing (67%,) while 25% said they have but do not know what it means, and 8% answered they know precisely what SRI implies.
Just 2% of French investors interviewed said they invested in an SRI fund, while 6% said they did not know, and 92% answered they do not invest in SRI.
Ipsos points out most of them might not know they already invest in SRI as 30% of French companies’ savings plans are managed this way.
Also, 92% of these investors said their banks or advisers have not put forward an SRI product, 5% answered they do not know and 3% said their banks/advisers have.
Other figures find that 51% of French investors surveyed assess SRI/ESG criteria to be very important or important, but only 17% are ready to ask for SRI products from their banks/advisers.
Finally, only 27% of French individuals interviewed said an SRI label backed by French authorities would lead them to choose SRI products, while 41% answered it would not and 32% remain uncertain.
AXA Private Management does not apply ESG criteria nor SRI standards as filters yet for its fund selection. However, AXA France’s branch reflects on selecting more funds applying those criteria in order to be more in line with the group’s strengthening SRI policy.
“We are thinking about it but it remains hard to provide this type of management style within multi-management,” says Antoine Machado, co-CIO of AXA Private Management.
“Poor offers linger on especially on the fixed income side. It will change with the rise of climate change issues and meetings such as the COP21. SRI is firstly an institutional issue. Retail investor feel less confident and SRI expectations are complex to identify.”
Machado says that over the last five years, only a couple of high net worth individual clients have asked for SRI funds in their portfolios.
The asset manager therefore either established a specific mandate or advised SRI funds for these requests. Machado adds that the track record of SRI funds is not always enough to meet retail investor expectations.
But that said “we shall keep in mind that SRI has become mainstream only recently and we will have to assess if SRI funds can bring value on a 10 or 15 year period.”
Cedrus’ head of Fund Selection Schaff says that SRI products, in particular best in class funds, are tailored for institutional clients’ investment philosophies focusing on the financing of the economy and a limited tracking error compared to indices.
“But retail clients often find difficult to understand those products as they do not correspond to what they think an SRI fund is,” he underlines.
“They do not expect stocks from petroleum companies and banking groups involved in economic scandals to be picked in the fund because these ones are less ‘irresponsible’ than their peers. SRI therefore struggles to attract retail clients,” Schaff observes.