Shedding light on Responsible Investing

This blog section on the Perennium website is now a year old, and I realize that I have never discussed here the topic of Sustainable & Responsible Investment (SRI). Too obvious, no doubt, given our activities; and too much of a well-worn subject too (Yet another article on SRI?). However, there are so many confusing and uninformed things said on the topic that I would like to clarify the matter.

Let’s start with a little provocation. No, the concept of SRI is not new (the first fund identified dates back to 1928). No, the market share of SRI in Europe is not 50%, as a study regularly quoted suggests, but rather 10 times less. No, the SRI field is not well understood now: for instance, 2 out of 3 French individual investors have never heard of it [1].

“The Cameraman” by Buster Keaton, a 1928 film, launch year of the first fund with an ethical filter (Pioneer Fund).

And most importantly, SRI is ill-defined. Officially, it is an investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact [2]. In practice, SRI covers seven different families of strategies, and this causes a lot of confusion. The simplest is to think in terms of your objectives and your own expectations.


I N V E S T I N G   I N   C O H E R E N C E

A first objective may be to align your investments with your mission or your values. Example: The Church of England excludes pornography and human cloning. Another example: Axa, as a health insurer, stops investing in the tobacco industry.
But there is a more granular way than excluding entire industry sectors, which is to look at each company, using societal standards commonly accepted around the world (e.g. the United Nations Global Compact). The rejection of corruption is unanimous (society norm). The rejection of GMOs less so (individual values).

In summary, the asset manager filters the investment universe using non-financial criteria (negative screening) and then invests “normally”, using only financial criteria, within this universe.


I N V E S T I N G   I N   D E P T H

A second objective is to reduce risks (to increase the risk-adjusted performance). The concept is to take into account the widest possible scope, beyond purely financial aspects, to identify long-term issues (some costs are not priced in, some assets are not sustainable, some practices are counterproductive). Example: the investment approach of the asset management company founded in 2004 by David Blood and Al Gore, whose global equity fund is also a benchmark in terms of financial performance.

In summary, the asset manager considers both financial and non-financial criteria simultaneously.

If the world is going to avoid more than 2 degrees of warming, the vast majority of existing fossil fuel reserves will be unburnable — and hence worthless. (mother nature network / Sami Grover, 2015). This illustrates the notion of “stranded assets”.


I N V E S T I N G   I N   C H A N G E

A third objective can be to “make a difference”: to have an impact in the social or environmental fields, but also a financial return. Example: investing in microcredit funds to alleviate poverty. The most common areas are financial inclusion, (affordable) housing, (renewable) energy, food & sustainable agriculture, healthcare, education.

In summary, the asset manager is a highly specialized professional, who operates in Private Equity and Private Debt, most often in Emerging Markets.


T H E R E   A R E   M O M EN T S   W H E N   O N E   H A S   T O   C H O O S E . . .

To further complicate the matter, the three objectives aforementioned are not necessarily compatible with each other. The decision to exclude Tobacco investments has nothing to do with financial returns considerations. The performance will be what it will be, the decision was taken on other criteria (aligning investment with mission & values). Actually, Tobacco can be a very good investment if one judges only by limited financial criteria: an infamous American fund specialized in vice and addiction has beaten its benchmark 9 years out of 10 in the decade 2004-2013 …

We have not yet mentioned the engagement approach, which is to use one’s power as a shareholder to change the company behaviour on ESG aspects, through regular dialogue and voting at annual general meetings. It could be said that this is another way of “making a difference”.


T O   C O N C L U D E

There are many acronyms in the sustainability field, let’s clarify again the three key ones. A corporation is going to talk about its CSR (Corporate Social Responsibility). An investor will talk about SRI (Sustainable & Responsible Investing). These are two sides of the same coin, it is just a matter of standpoint. In both cases, ESG criteria  are the measurement units.

In our view, there is no “one size fits all” or ultimate truth in SRI. Knowing why one embarks on an SRI approach is essential, and it will shed light on the question of how to do it. A foundation requesting 100% SRI-compliant portfolios from its banks without saying more would end up with an inconsistent and inefficient aggregate, due to a lack of underlying logic and specific guidance. Work must be done upstream. We don’t expect the mason or the carpenter to draw up the plans of the house, it is the architect’s skill. That’s why Perennium approaches SRI as the rest of its business activities. Listen, explain, help decide, design, supervise the implementation: we support our clients from start to finish. Without proselytism (we are not “sellers of SRI”), simply as pragmatic seasoned investors.



[1] See

[2] Source: US-SIF (The Forum for Sustainable & Responsible Investment), link.