Are there good and bad sustainable investments?

The offer of sustainable or SRI (Socially Responsible Investment) funds has grown considerably over the past several years. As a result, investors sometimes find it difficult to identify funds that reflect their own sustainable goals because each management company or fund manager can have a different investment strategy or favour one sustainable investment criterion over others.

What is an ESG fund and how is one built?

The majority of funds pursuing an ESG strategy try to contribute to the achievement of the 17 sustainable development goals defined by the United Nations:

Surce: unpri.org

To achieve these goals, the ESG strategies base their investment process on an analysis of the extra-financial variables below, in addition to traditional financial variables (valuations, company balance sheet quality, etc.):

Environment

  • Air, water and ground pollution
  • Greenhouse gases emissions
  • Energy use and efficiency
  • Raw materials consumption
  • Transportation
  • Water and waste management
  • Biodiversity and its protection
  • Lifecycle impacts

Social

  • Net social utility
  • Working conditions, health & safety
  • Diversity programmes
  • Retention
  • Human righty
  • Relationships with stakeholders (unions, NGOs, communities, etc.)
  • Supply chain management
  • Materials sourcing
  • Product safety and quality
  • Customer relationships

Governance

  • Culture and ethics
  • Shareholder rights
  • Audit and accounting
  • Corruption and bribery
  • Board and Board Commitee characteristics
  • Board member competence
  • Independance
  • Compensation
  • Risk management
  • Transparency
  • Regulatory capture

The interpretation of these extra-financial variables can vary from one management company to the next, within a company, and from one manager or analyst to another.

Special attention must, therefore, be paid to the degree to which the ESG criteria are implemented; in other words, to the level of tolerance of controversial activities in the funds.

For example, some management companies don’t tolerate handguns or anti-personnel mines, while investments are accepted in energy producers, as long as nuclear energy does not account for more than 30% of their revenue.

For others, like ING, for example, it is important to support companies that make a significant commitment to reducing their carbon footprint and to improving their social and good governance aspects. Most companies committed to ESG publish governance and sustainability reports and take significant steps to ensure transparency and to provide information on the topic.

 
 

How can you be sure that the funds are really sustainable?

Fund managers rely on data suppliers which enable them to quantify and objectify a maximum amount of information and ESG criteria. The databases are important tools which, however, have some limitations:

 

the data are statistical and based on the past

the information used depends on the communication and transarency of the companies analysed

Downstream of the funds, it’s also important to have independent organisations which check the portfolios of the ESG funds and verify the extent to which the sustainable investment criteria are being met. In Luxembourg and in Belgium, LUXFLAG (www.luxflag.org) and Febelfin (www.towardssustainability.be) have created sustainable investing labels. They provide a guarantee that the ESG funds that have obtained the labels meet minimum quality standards.

Some management companies go even further and use their voting and speaking rights at general meetings to oppose any projects or decisions which go against ESG criteria and/or their ESG convictions (Active Stewardship). Management companies, therefore, have privileged access to company managers and can try to positively influence them to meet ESG criteria. This can be enforced via disinvesting.

As an investor, you can also speak with experts who can analyse the funds you want to invest in. For example, at ING, we have noted that funds related to new energies, food, hygiene and water have a much lower likelihood of holding the shares of companies with controversial activities.

 

In conclusion?

Although there are Principles, analytical tools and control organisations, compliance with ESG standards (environmental-social-governance) is primarily a question of commitment and of convictions and always involves a degree of subjectivity.

This shouldn’t prevent us from investing in ESG funds because it’s by promoting sustainable investment that we can encourage companies to become zero-carbon and to comply with other environmental, social and good governance criteria. Investing more ethically and responsibly to ensure that this becomes the new investment standard!

 

 

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