Responsible investing in different cultural contexts

(First of four parts)

We all choose our own ways of being ethical and responsible. Some people will attempt to have a zero carbon footprint by eating meat or traveling on planes but actively recycle or tap into renewable energy or donate to forest rehabilitation funds. Others will be shopaholics but give their clothes to charity. Still others do not mind working in a conglomerate with less-than-stellar labor practices, to earn enough to pay their own staff at home above-average wages — at least redistributing the wealth from an urban tycoon to the provinces. Some people, of course, will do none of the above.

Similarly, there are a myriad of ways in which people choose to invest their money responsibly or ethically. And while we cannot generalize how an entire nation or population behaves, we do see some cultural trends stand out, particularly when we observe that the pace of growth of responsible investing has been largely heterogeneous across geographies. I wrote a chapter on this topic in a book* way back in 2013 and not much has really changed since then. The growth of consciousness in how we use our money for good is dependent not just on the legislative and regulatory environments but on cultural factors as well.

To wit, society plays a role in shaping Responsible Investment (RI) practices. This column is the first of four parts detailing the situation in different regions. Today we look at Europe and North America, next week Latin America, the week after Africa, ending the series with Asia Pacific.

In previous columns, I explained about how responsible investing has roots in religious practices from the United States and made its way to Europe where it is now considered mainstream. All if not most government pension funds in the EU do not invest in nuclear weapons or cluster munitions, so every European, to a certain extent, is already practicing RI. Many banks now offer savings accounts which can only be invested in companies which meet specific sustainability criteria. And the EU has rolled out standardized sustainability reporting, advocating for firms to be more transparent with their practices.

The European RI market caught up with the US market in 2007 and has since surpassed it as the leading geography. And yet even then, Europe is by no means a homogeneous region. While communication through disclosure is increasing, actual implementation remains highly voluntary and is practiced to a significantly lesser extent. Countries in Europe take on different strategic approaches to RI based on their cultural rootedness. For instance, Germany has a strong environmental focus, promoting nature conservation, nuclear safety, and energy efficiency through thematic funds. The Netherlands also has a similar approach, providing tax exemption mechanisms introduced in its Green Funds Scheme. Italy on the other hand, has a strong focus on governance, particularly on protecting its smaller investors following the 2003 Parmalat scandal.

This pension fund leadership has formed the key trend in Europe wherein the RI market is almost exclusively driven by institutional investors, which currently represent 92% of all assets under management. The main approach of these investors is what is referred to as ESG (environmental, social, and governance) integration wherein ESG criteria is used during traditional financial analysis. France adopts the best-in-class approach, wherein investee firms within an industry are ranked in function of their ESG performance. Those which either pass a minimum threshold or are the best in their industries are eligible to be included in the investment universe. This method allows bringing in a degree of flexibility in the construction of the portfolio, especially in enabling the inclusion of high-performing companies in extractive industries such as mining or controversial industries such as firms involved in nuclear power production.

Other types of retail investments such as ethical type investments, those driven by High Net Worth Individuals (HNWI), or impact investments such as Microfinance — albeit growing, represent a marginal portion in Europe. Shareholder activism strategies are mainly used in the UK, the Netherlands, and Nordic countries but not in the rest of the continent. It appears that Europe has shifted away from an ethical approach and takes a highly pragmatic and non-prescriptive approach, attempting to use sustainability criteria to meet its financial goals from a largely risk-reduction perspective rather than imposing a moral stance on its citizens. While this makes sustainability issues somewhat easier to translate into a financial language and more readily integrated by traditional asset managers, a fundamental question remains as to whether these “loosely coupled” practices will truly have a positive and material impact on society.

The United States is one of the oldest and most traditional RI markets. Given the shift from religious to civil society motivations and an increasing ethical consumerism movement wherein the consumer is willing to pay a premium for products (or services) produced in a way consistent with his or her personal values, investment strategies of retail sustainability funds have evolved from negative to positive screening. Similar to Europe, RI in the US is currently driven by institutional investors, specifically pension funds. However, in contrast to Europe, the US and Canada maintain rootedness in an ethical and societal approach with moral concerns continuing to be made explicit in this market. n

*The original book chapter from where this series is based is published in Italian: Laurel, D. & Piani, V., 2013, L’SRI nei diversi contesti culturali (Socially Responsible Investing in Different Cultural Contexts) in Creare Valore a Lungo Termine (Creating Long-term Value), eds. Del Maso, D. and Fiorentini, G. EGEA (Milan, Italy).

Daniela “Danie” Laurel is a business journalist and anchor-producer of BusinessWorld Live on One News, formerly Bloomberg TV Philippines. Prior to this, she was a permanent professor of Finance at IESEG School of Management in Paris and maintains teaching affiliations at IESEG and the Ateneo School of Government. She has also worked as an investment banker in The Netherlands. Ms. Laurel holds a Ph.D. in Management Engineering with concentrations in Finance and Accounting from the Politecnico di Milano in Italy and an MBA from the Universidad Carlos III de Madrid.