Sunday, 25 February 2018

    SRI and ESG – is there a difference?

    BNP Paribas Investment Partners’ Jacky Prudhomme explains the difference between SRI and ESG, in the first of a series of guest articles

    Jacky Prudhomme is head of ESG integration at BNP Paribas Investment Partners. To hear more of his views on how trustee boards can integrate ESG considerations into their portfolios, dial into Engaged Investor’s webinar, in association with BNP Paribas Investment Partners.

     

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    BNP Paribas

    The big difference between SRI and ESG investing is the approach to how companies are included or excluded from investment portfolios.

    SRI is based largely on excluding certain companies from your portfolio, which you identify using a series of criteria related to, for example, environmental and social practices. Once a full list of companies has been analysed, sector by sector, you’d typically end up excluding the bottom-performing third from the portfolio, and those companies would essentially be off limits to fund managers.

    ”ESG is really about protecting you from reputational and operational risk”

    Another element of SRI is to actively seek out companies making a positive impact in terms of their environmental or social practices. In the social realm, for example, the company could be investing in social housing or helping the long-term unemployed to find jobs. In the environmental arena, it could be investing in renewable energy.

    So you start by identifying social and environmental objectives, then you identify the best companies doing those activities and achieving those objectives, and then incorporate them into your portfolio to achieve a financial return.

    And then, from the opposite perspective, we have ESG. There is common ground, of course, but the big difference is that you don’t systematically look to exclude or include specific companies. Instead, a fund manager will incorporate ESG practices into a broader range of criteria, thus enriching his knowledge of the company and giving him more tools when he assesses the level of risk he wants to take in specific investments.

    Workplace Pensions Live 2017

    Managing climate change risk is just one of many areas that will be explored at Workplace Pensions Live, our flagship annual event on 10-11 May in Birmingham.

    The event is free for scheme managers and trustees to attend. Click here for more information.

    Having an in-depth knowledge of the ESG dimensions of a company will give you invaluable insight into that firm’s strengths and weaknesses.

    ESG is really about protecting you from reputational and operational risk, so you want to get some understanding of the risk inherent in the companies you’re investing in. But it’s not as in-depth or prescriptive regarding the integration of the indicators and selection rules as SRI.

    It doesn’t mean that ESG is a kind of “SRI-lite” process; it just means that ESG can be applied to any management style; that you can plug the ESG information into the tool-kit of fund managers, and maybe provide better forecasts of the risk and soundness of the companies we’re investing in.

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