Understanding Responsible Investment #9 - Focus on sustainable passive management

Dorothée Chapuis: Hello everyone and welcome to the ninth 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 Gilles Guesdon, Head of SGPB’s external funds offer.

Dorothée Chapuis: Gilles, can you give us the definition of passive management, please?

Gilles Guesdon: Passive management occurs when the portfolio construction process is not based on the intervention of an asset manager, as opposed to active management where the choice of investments is based on a manager's conviction. Passive management mainly covers index funds that exactly replicate the composition and behaviour of market indices. Among these index funds, there are those that can be traded continuously on the market and which are called ETFs, "Exchange Trade Funds". These ETFs replicate all kinds of market indices on the main asset classes: stocks, bonds and money market.

Dorothée Chapuis: Very well. I think there is a debate to classify such funds as responsible investments, tell us why?

Gilles Guesdon: Yes, there is a debate because of their very nature: when responsible investment first emerged, some management professionals did not recognise their status as socially responsible products. The reason put forward was that portfolio construction was not a choice that took into account extra-financial criteria. In passive management, the key factor in portfolio construction is to follow an index as closely as possible. Some also criticized the automation of index management, which, in the event of market excesses, both on the downside and the upside, could be a factor in accelerating volatility. Advocates of responsible passive management -which I personally am -explain that one should not look at how the fund's portfolio is constructed, but at how the underlying index is constructed. There is a whole series of indices that are constructed by explicitly taking ESG criteria into account (see podcast #3 in which we defined these notions). For example, some indices have ESG exclusion filters, or to include minimum ESG scores. There are also indices that target themes and some of these themes are linked to the seventeen Sustainable Development Goals. This is how we can say that passive management, if it does follow a sustainable index, can be qualified as sustainable. The defenders of this thesis have seen their position reinforced by the European Commission. As part of its major sustainable finance project, two new sustainable indices are being introduced: the "EU Climate Transition" index and the "EU Paris-Aligned" index. The first is aimed at companies involved in transition activities and the second at those with a business strategy aligned with the Paris 2%C alignment agreements, taken in 2015 at COP 21.

Dorothée Chapuis: Thank you Gilles, we have a better understanding of how an index fund can be sustainable. We have to make sure that the index being tracked is also sustainable. And what about the other aspect that characterizes SRI investment, namely commitment?

Gilles Guesdon: With regard to commitment and voting policy, the principle is the same, in the end, as for other non-index funds. From the moment the portfolio is invested in equities, the manager of an index fund or ETF is in a position, on the one hand, to meet with companies to question them about their progress and, on the other hand, to exercise his or her voting rights.

Dorothée Chapuis: Very clear, thank you Gilles! With a voting and commitment policy and a sustainable index or ESG, an index fund or ETF has all the conditions to be considered as contributing to responsible finance.

Gilles Guesdon: That's exactly right, Dorothée. Turning to our offering, Societe Generale Private Banking selects ESG ETFs across a variety of asset classes. Our main partner, Lyxor, the asset management subsidiary of the Société Générale group, markets ETFs that have been awarded the SRI label by the French government, as well as the main fund indexed on a Green Bond index, which has been awarded the Greenfin label by the French Ministry of Ecological Transition (see podcast n°2, "Performance and Labels").

Dorothée Chapuis: Thank you very much, Giles, for that clarification. It is understandable that with the responsible finance labels, ETFs are sustainable and positive products that are very interesting to consider, provided of course that they also correspond to your objectives, depending on the level are willing to accept in terms of risk. During our discussions, Gilles, you mentioned, the notion of the 2°C alignment of the Paris Agreements. These notions will be discussed in a future episode. Thank you, Gilles, for answering my questions, and see you very soon.

Gilles Guesdon: You’re welcome, Dorothée, I was delighted to be part of this episode and to bring you my insights. Goodbye!

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 Podcasts 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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