Sustainable Investment Glossary
“Sustainable development meets the needs of present generations without compromising the ability of future generations to meet their own”. This definition is taken from the ‘Brundtland report,’ founder of the concept of sustainable development, 1987.
It is central to various initiatives and behaviours that aim to have a positive long-term impact on society. Responsible investing is part of these behaviours.
These initials are used by the financial community to refer to the Environmental, Social and Governance (ESG) criteria, which are generally the three pillars of extra-financial analysis. They are taken into account in socially responsible management.
ESG criteria can be used to assess the extent to which companies are responsible for the environment and their stakeholders (employees, partners, subcontractors and customers).
- The environmental (E) criterion takes into account waste management, the reduction of greenhouse gas emissions, the prevention of environmental risks, etc.
- The social (S) criterion takes into account the prevention of accidents, employee training, compliance with employment law, the supply chain, social dialogue, etc.
- The governance (G) criterion verifies the independence of the board of directors, the management structure, the existence of an audit committee, etc.
It is necessary in a responsible investment strategy to analyse the relationship between a company's financial performance and its environmental and social impact. For example:
- A company that actively strives for the safety and well-being of its employees will thus have less risk of workplace accidents, social disputes or absenteeism that could impact its profitability.
- A company involved in sustainable irrigation in a water scarce region has an offering suitable for the long term.
- A company that reduces the volume of its packaging controls the environmental impact of its products, while simultaneously achieving cost savings.
In the context of a responsible investment, the investor may have to exclude certain types of investment from his/her portfolio because it does not comply with certain ethical or moral principles or with international standards.
In practice, the ten principles of the United Nations Global Compact are the standard that is often used. These principles are based, in particular, on the Universal Declaration of Human Rights, the International Labour Organization (ILO) Declaration on Fundamental Principles and Rights at Work, the Rio Declaration on Environment and Development and the United Nations Convention against Corruption. Other treaties include:
- The Ottawa Convention, which prohibits the acquisition, production, stockpiling and use of anti-personnel mines.
- The OECD guidelines for multinational enterprises, which reflect the expectations from governments to businesses on how to act responsibly.
The aim of norm-based exclusions is to influence excluded companies into enhancing their ESG practices so that they can be included in sustainable portfolios once they comply with the norms.
Sector exclusion is similar to norm-based exclusion, because in both cases it involves excluding, from the investment universe of an SRI fund, companies whose behaviour is harmful to human beings or the environment.
In the case of sectoral exclusion, it involves excluding companies which derive a portion (considered significant) of their revenues from activities deemed harmful to the environment and society. They are either ethical exclusions (alcohol, tobacco, armaments, gambling, pornography) or environmental exclusions (GMOs, coal, palm oil).
Let's take the example of unconventional fossil fuels: you can exclude from your portfolio all industry players that generate their revenue mainly in this sector (shale gas or oil, tar sands and any oil or gas resources from the Arctic).
These initials refer to the Sustainable Development Goals of the United Nations (UN).
In 2015, the UN brought together States, NGOs, and for the first time companies, to draw up the 17 Sustainable Development Goals (SDGs). The 17 SDGs represent a common framework to tackle both social and environmental issues. They address global challenges such as poverty, inequality, climate change, environmental degradation, war or justice. Given their interconnection, it is important to have a positive impact on all of the 17 SDGs.
Sustainable themes are investment approaches that provide solutions to social and/or environmental challenges. Examples of players working in sustainable themes:
- A company which has developed innovative technology that seals water leaks in pipes without recourse to large-scale work.
- A fund which invests in international companies developing technologies for the energy transition.
BNP Paribas Wealth Management measures the accessibility and consistency of the information provided by asset management companies about their investment process. For example:
- Does the management company publicly disclose the full composition of its portfolio?
- Does it publicly disclose its extra-financial selection process (exclusions, ESG filters, voting and engagement policy, etc.)?
Voting and engagement
Engagement is an approach carried out by asset management companies to encourage and support the companies in portfolio to improve their ESG practices over the long term. This engagement is carried out in two complementary ways:
- Through the exercise of voting rights at annual general meetings, with a clearly-defined voting policy on ESG issues. The voting policy thus defines the main principles for the running of companies that the management company requires, and which will determine its voting instructions at annual general meetings.
- Through a long-term dialogue with companies on ESG issues upstream of the investment and throughout the holding period of the securities.
These initiatives regularly provide management companies with the opportunity to join forces with their competitors to send a common message to the targeted companies.