Understanding Responsible Investment #4 - The three characteristics of SRI 1/2
Dorothée Chapuis: Hello everyone and welcome to the fourth episode of our "Understanding Responsible Investment" podcasts series. I am Dorothée Chapuis, Head of CSR for Société Générale Private Banking Luxembourg, Monaco and Switzerland, and I am with Petra Besson, Portfolio Manager at Société Générale Private Wealth Management.
Dorothée Chapuis: Petra, what are the elements that define responsible portfolio management?
Petra Besson: There are three principles that define socially responsible investment management, or SRI management. First of all, the type of responsible management approach, then, voting and commitment policy, and finally, transparency and reporting.
Petra Besson: There are three approaches generally adopted by fund managers, which I will describe. The first approach is based on exclusions: this is the most common approach. Most SRI strategies exclude from their investment universe issuers that do not meet certain criteria related to their practices and activities. This is based both on ethical considerations and the desire to avoid reputational riskfor the investor. Exclusions related to the practices of issuers areaimed at issuers that do not comply with major international treaties such as the Ottawa Convention, which prohibits the acquisition, production, stockpiling and use of anti-personnel mines, or the United Nations Global Compact, which includes ten principles relating to respect for human rights, international labour standards, the environment and the fight against corruption. This is known as normative exclusion. These exclusions that are aimed at sectors of activity are more in line with ethical or value-based criteria. Among the activities most often excluded are unconventional fossil fuels, the arms sector, tobacco or agent gambling, etc. Let me remind you that at Societe Generale Private Banking we apply an exclusion filter on all our portfolios, funds and mandates, on controversial weapons, on non-compliance with the United Nations Global Compact, and on companies with the most severe ESG (environmental, social and governance) controversies. For funds under SRI management, we go further in the exclusions as we exclude companies the turnover of which has more than 15% exposure to the arms, gaming, pornography, tobacco and GMO sectors.
Dorothée Chapuis: Let's look at the first principle: the management approach. How can non-financial factors be taken into account in the management process?
Dorothée Chapuis: Thank you, Petra. So as an investor, a first way to take into account sustainable development criteria is to exclude certain companies or sectors of activity. What is the second approach?
Petra Besson: It's the one based on multi-sector ESG selection: the idea here is to select issuers according to their ESG rating, a notion we defined in the first podcast. If the fund manager invests in companies with the best ESG ratings without excluding any sector of activity, this is known as the "Best-in-class" approach. This is a very common approach, particularly in France where it accounts for the majority of SRI assets under management. Funds managers can also base their choices on the best prospects for improving the ESG rating, in which case it is referred to as a "Best-Effort" approach. This latter approach is interesting: by preferring companies that improve their practices, we maximise the portfolio's impact in favour of sustainable development, no doubt more than by preferring companies with the best ESG ratings and which therefore no longer have much investment to make to improve their practices because they are already excellent. There is a third way in ESG multi-sector selection. This is the "Best-in-Universe" selection: the manager selects stocks with the best ESG ratings across all economic sectors. This type of strategy will de facto rule out certain sectors such as the most polluting activities or those with high CO2 emissions, for example. Of course, I would remind you that ESG selection of any kind can be combined with in-depth financial analysis, and stock selections are made according to the best risk/return profile.
Petra Besson: This is the thematic selection. The fund manager invests in sectors directly linked to sustainable development issues such as renewable energies, energy transition, or in social issues such as diversity, health or education for example. Responsible managers often combine these approaches. Notably the exclusion approach which is associated with the selection approach or the thematic approach. The management company or manager first defines its investment universe including exclusions and then builds its portfolio using multi-sector or thematic selection. Regardless of the selection approach chosen, classic financial criteria such as the strength of the company, its earnings capacity, its competitive positioning, etc. are always part of the investment analysis. For our SRI management offer, it is the combined approach of exclusion (I mentioned this just before) and Best-in-Class and Best-Effort multi-sector selection that we have chosen at Societe Generale Private Banking.
Dorothée Chapuis: All right, Petra. As an investor, I can therefore look at how a manager takes ESG criteria into account, what selective approach he uses. You told me at the beginning of our exchange that there are three approaches, so what is the last way to operate responsible management?
Dorothée Chapuis: So to sum up, as a responsible investor, I can look at the way in which extra-financial criteria are taken into account, either exclusion, or selection, or thematic approach, or a combination of these approaches. We will see in our next podcast the other principles that characterize socially responsible investment, namely engagement and reporting. Goodbye Petra and thank you very much for your insights.
This podcast is part of a series of episodes proposed by Societe Generale Private Banking to understand responsible investment. It is available on the Spotify and Apple Podcast streaming platforms via the "#Private Talk by Societe Generale Private Banking" program and on our website www.privatebanking.societegenerale.com. Feel free to subscribe to be notified when the next episode is released and to spread the word.
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