Socially Responsible Investments Taking Hold

As corporate social responsibility (CSR) develops, interest in ethical financing has grown. Some put it down the recent financial scandals, while others have attributed it to a growing awareness of environmental issues and sustainability. Whatever it is, ethical finance is burgeoning, with current products including ‘ethical credit cards’.

The CSR Digest sought out Head of Sustainable and Responsible Investments at BNP Paribas Asset Management, Eric Borremans, to shed light on the area. Based in Paris, Borremans leads the development of BNPP AM product offering for institutional and retail clients and heads a team of analysts conducting extra-financial research in the field of corporate governance, environmental and social responsibility for a range of equity, fixed income and asset allocation funds for retail and institutional clients. His team is also responsible for exercising voting rights across BNPP AM’s mutual funds and mandates.

CSRD: Why is there more allocation towards ethical companies? How does this affect the market?

EB: There are a few factors that have contributed to the increase in the profile of ethical companies and what is encouraging is that there is a concentrated effort to fight climate change. This stems from the understanding of the need to change and adapt the way we live and do business, as the traditional way will be unsustainable due to the depleting global resource and changing environment. The following factors may have contributed to the increased allocation towards the sector, but we also believe that the awareness and general understanding of the urgency to conserve our resources and preserve our environment is slowly hitting home.

First being the efforts and commitment by governments globally to fight climate change. Secondly, the massive capital reallocation towards the green sector has motivated Sustainable and Responsible (SR) businesses to lead the way. The third supporting factor will be from a policy standpoint – being the implementation of green legislations by major geographies around the world. This push will ultimately result in a stronger presence for SR businesses and in the long run, consumer’s general preference for greener products and services.

The steps above will lead to creation of “green jobs” which will be seen as a welcoming move to bring life to the depressed economy. Countries that are investing in SR today realise that they stand to benefit most in the next economic growth because with green architecture in place, they will have a sustainable growth platform.

With the passing of new green legislations together with the increasing preference for green products, companies will soon recognise that the green economy is the path of the future. These factors will translate to interesting opportunities for investors and is certainly a boost for the green economy. The support and assurance by government as part of measures to revive the current global economy will certainly add to the overall sustainability of the asset class.

CSRD: How well do companies in the Asia Pacific region, especially Singapore and Malaysia, fare when it comes to keeping to the standards that ethical funds have?

EB: Sustainable and responsible investments are still at an early stage in Asia. There is a need to provide more education and awareness on the matter and along with that, the need to dispel the misconception that SR translates to charity only and comprise of a very small investment universe.

In early March 2008, Bursa Malaysia rolled out a CSR framework for Public Listed Companies. Also in March 2009, under the RM 60 billion stimulus package, the Malaysian government offered incentives to companies with green technologies.

CSRD: What is the benefit of ethical and/or green funds to investors?

EB: Against the backdrop of the recent economic crisis, socially responsible investments have outperformed the overall equities market. Moving forward as markets recover and investors gain more confidence, we anticipate the SR industry as a whole to grow further and should stand out in terms of performance in the medium to long term duration.

Nevertheless, with the depleting natural resources and drastic climate change taking place worldwide, we believe that SR business will better prepared to deal with the potentially adverse conditions and rising cost environment. Failure to do so will leave the forthcoming generations with an unimaginable and to a certain extent frightening world to live in. Therefore, SR industry is certainly the way forward.

CSRD: What is the difference between these funds and HwangDBS Environmental Opportunities Fund (EOF)?

EB: The main differentiating factor of EOF is its well diversified investment strategy. Its portfolio is made up of companies from all three sub-sectors which comprises of 40 per cent renewable energies and energy efficiency, 35 per cent water treatment and pollution control and the remaining 25 per cent in waste technologies and resources management. EOF investment portfolio encompasses a balance of 50 per cent large or mid cap and their other 50 per cent in small caps companies totaling to 50 to 70 equities.

CSRD: According to the sales kit, BNP Paribas Asset Management, as the external manager of EOF, is able to identify profitable environmental technologies and services. How?

EB: We apply a very structured and disciplined investment process which broadly involves five (5) main steps. The first cut is identifying a universe of 1000 eligible stocks, thereafter moving to the second step which is a rigorous qualitative analysis with proprietary model applied to the reduced stock selection to 400. Following from that, a careful selection of 150 suitable stocks are further identified. Lastly, the two (2) most crucial steps involve creation of the portfolio and ongoing organisation. In its creation of portfolio step, around 50 to 70 stocks are picked through individual stock strategies and are weighted in relative to the sector.

CSRD: Any other comment?

EB: Despite the economic crisis that has affected world markets, green technologies remain an attractive investment opportunity. Plus the political support for addressing environmental problems has never been so strong, with over US$400 billion in fiscal stimulus packages have been allocated to clean technologies such as renewables, energy efficiency measures and water treatment infrastructure. All these measures directly benefit companies in which the EOF invests and we remain optimistic about the prospects for the rest of this year.◊

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