Definition of responsible investment
Socially Responsible Investment(ISR)corresponds to an approach which, in addition to taking into account the usual financial criteria, integrates extra-financial criteria which correspond to factors relating to the environment, social issues, ethics and governance in making investment, placement and portfolio management decisions.
In other words, responsible investment, or responsible finance which combines ethics and financial performance, is defined as all the approaches aimed at applying the notion of sustainable development in an investment choice and in the management of asset portfolios.
Principles for responsible investment
The Principles for Responsible Investment are a voluntary commitment aimed at the financial sector and encourage investors to integrate Environmental, Social, and Governance (ESG) issues into their portfolio management. They represent one way to move toward a widespread consideration of non-financial aspects by all financial professions.
So, theinvestors who agree to respecttheseprinciples for must:
- Takestake into account ESG issues in investment analysis and decision-making processes;
- Be active investors and take ESG issues into account in their investor policies and practices;
- Request that the entities in which they invest publish appropriate information on ESG issues;
- Promote the acceptance and application of the Principles among asset management stakeholders;
- Work in collaboration with all stakeholders to improve their effectiveness in applying the Principles;
- Report individually on their activities and progress in implementing the Principles.
By applying and implementing these principles, investors contribute to building a more responsible global financial system.
The advantages of responsible investment
Socially responsible investing or ethical investing provides several benefits to investors, including:
- long-term performance potential:studies have shown that companies with high ESG scores deliver returns equal to or better than companies with lower scores;
- Stable performance: SRI funds have demonstrated stable performance over the long term, thus offering investors attractive return potential while reducing the volatility of their portfolio;
- Risk reduction: by integrating ESG criteria into their analysis, investors reduce exposure to risks linked to environmental, social and governance controversies, which protects their capital and improves the sustainability of their investments;
- Access to new opportunities: by favoring companies that integrate sustainable practices, SRI offers investors access to sustainable investment opportunities in growing sectors, such as renewable energies which will have long-term performance potential;
- Portfolio diversification: SRI includes companies that are not necessarily represented in traditional market indices.
- Positive impact on the world: SRI investors contribute to a more sustainable and fairer world by investing in companies that have a positive impact on the environment, society and governance;
- Transparency and commitment: companies with SRI are often more transparent about their ESG practices and more open to investor engagement on these issues.
How to invest responsibly
Responsible investment refers to approaches aimed at taking into account the notion of sustainable development in a choice of financial investment, and in the management of portfolios (deposits, bonds, shares or investment fund units).
It is part of a process that encompasses any investment decision aimed at reconciling, on the one hand, an objective of financial profitability common to all types of investments and, on the other hand, a desire to finance only entities seeking to highlight their social responsibility by improving their performance in terms of respect for the environment, social progress and good governance.
So, for the investment decision to be an ethical investment, it must meet a number of criteria, including main:
Environmental criteria
The environmental criterion can be used as a material criterion for analyzing the impact of the company’s activities on the environment in terms of its greenhouse gas emissions from waste recovery, its impact on biodiversity and the use of renewable resources.
Share capital criterion
The social capital criterion focuses on an aspect of the company relating to its respect for human rights, the relationship it maintains with the population surrounding its production and resource exploitation sites.
Human capital criterion
The human capital criterion concerns the company’s compliance with labor law, the quality of the social dialogue adopted, employee training, as well as compliance with pay equity.
Leadership and Governance Criteria
The leadership and governance criterion makes it possible to assess the quality of management practices applied within the company, the remuneration of managers and the transparency of accounting practices.
Why invest responsibly?
Savers today place significant importance on social, environmental, and governance impacts when choosing their investments, whether through a socially responsible fund or directly. Investors, whether institutional or private, are increasingly focusing on sustainable strategies and products.
In this context, the choice falls on socially responsible investment for several reasons:
Climate
Managing a portfolio of stocks that is neutral in terms of all negative externalities on the environment, biodiversity, or soils does not exist, because every investment has an impact on the climate. Therefore, choosing to support environmentally friendly companies and investments helps contribute to the decarbonization of society.
Best performance
Indeed, due to regulation and resource depletion, some polluting industries have already suffered exclusions from investment funds. Similarly, the market could tomorrow handicap those who are not concerned about respecting the environment.
Company image
Responsible investing ensures the development of a positive image among clients, partners, and the public. Because the investment choice isn’t a one-sided decision. Therefore, displaying your ESG criteria requirements will certainly tip the scales in your favor.
Strengthening the regulatory framework
The regulatory framework has undergone enormous changes in recent years, with the aim of optimizing the dynamics in favor of sustainable finance, in order to:
- Redirecting capital movements towards sustainable investment;
- Limit financial risks due to environmental and social problems;
- Encourage transparency and long-term oriented activity in the financial sector.
Conclusion
Faced with the urgency to be more concerned about the global well-being of our planet, the encouragement of companies with explicit sustainable objectives becomes a necessity, and this through the financing operation which results in the choice of socially responsible investment which isthe application of the principles ofsustainable developmentto financial investments. Because the objective of responsible investment is threefold in that it seeks to be profitable while also having a social and environmental mission.
