3 minA closer look at sustainable and responsible investment
CSR, SRI, ESG: cutting through the jargon As these themes are constantly evolving, investors can find it difficult to plot a course and make informed investment decisions. This is how we define these key concepts.
ESG criteria
ENVIRONMENTAL
Waste management, reduction of greenhouse gas emissions, prevention of environmental risks, etc.
SOCIAL
Prevention of accidents, employee training, respect for the rights of employees, the supply chain, employee-labour relations, etc.
GOVERNANCE
Independence of the board of directors, the management structure, the presence of an audit committee, etc.
The themes embodied in Corporate Social Responsibility (CSR) and Socially Responsible Investment (SRI) are gaining traction among both institutional and individual investors.
A responsible approach
The first step for any company is to be aware of its social responsibility. INDR1 (Luxembourg’s national institute for sustainable development) describes CSR as a positive approach to doing business that reflects a company's contribution to sustainable development. CSR is not a fixed set of strictly defined policies and it may cover a variety of areas such as the development of responsible social and environmental policies, active engagement in corporate philanthropy (societal and cultural projects...), etc.
Investing with a sustainable vision
SRI is characterised by a long-term approach which, according to Eurosif2, combines fundamental analysis and engagement with an evaluation of ESG factors in order to achieve better long-term returns for investors and benefit society by influencing the behaviour of companies.
Different management approaches
The management of the portfolio may follow various approaches. Although each of these management approaches may be operated independently, they are not exclusive and are often combined within a portfolio.
EXCLUSION: generally considered the simplest way to initiate a responsible and sustainable approach. This strategy does not require a proactive role from the manager as it consists of excluding sectors or activities by taking various criteria into account. These criteria may be enshrined in standards (e.g. compliance with international conventions) or linked to ethical and/or faith-based considerations (e.g. the fight against weapons, alcohol, pornography, etc.).
ESG: factoring environmental, social and governance criteria into the process of analysing and selecting securities. This may start with a simple desire to reduce the risks linked to these factors (e.g. analysis of controversies and reprehensible company behaviour) to a more advanced ‘best-in-universe’ approach, where only companies with the highest ESG ratings are considered.
THEMATIC: these strategies adopt a specific investment theme while taking ESG criteria into account to a greater or lesser extent (e.g. water management, ageing population, etc.)
IMPACT: the objective of this type of management is to invest in a project that has a measurable impact on society. The two main tools are green/social bonds, which allow the financing of large public projects (e.g. wind farms), and microfinance, which provides small loans to people with low incomes to start up their own business.
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