The range of Socially Responsible Investment solutions has grown significantly and allows investors to access usual search of performance as well as a simple hedging of specific risks or a thematic exposure.
First of all, the Best In Class approach, favored by institutional investors for a long time, has the dual advantage of providing equity exposure respecting its sectorial and geographical features while improving portfolio footprint on Environmental, Social and Governance dimensions. Hence the use of « Core SRI » terminology to name this approach. Portfolio construction is governed by simple and transparent rules (i.e. within a sector, overweight companies with the best ESG practices and on the other hand exclude/underweight companies with the least good practices). This allows to capture the performance arising from good behavior (“SRI alpha”). However, since the ESG analysis is a long-term one, complementing it with fundamental and/or quantitative analysis helps to benefit from additional sources of performance and to add robustness. Our Best In Class funds benefit from our extra-financial analysis capacities and our fundamental and quantitative research abilities, all administered by fund managers specialised in portfolio optimisation techniques, implementation and risk control. The performance realised on different geographical areas illustrate the ability of this approach to generate alpha on top of presenting a “clean investment”.
Despite this “SRI alpha” many investors are firstly perceiving SRI as a way to be hedged against some risks. Then they are expecting a market exposure presenting nearly the same characteristics than the original index (country, sector, size, …) while avoiding investments on specific stocks or industries. Amundi index portfolio managers are frequently asked to respect a list of restricted stocks while minimising the impact of such restrictions on the Tracking Error. Those exclusions lists can be provided directly by the investor or can be determined by Amundi extra-financial analysts based on investor guidelines such as, for example, avoiding companies with more than 5% of their revenues coming from controversial activities (tobacco, alcohol, gaming, weapons, …)
Risks to be hedged are sometimes limited to very specific areas of the ESG spectrum. For example, in the context of global warming, Amundi is proposing a low carbon investment approach. We are convinced that companies with the worst carbon emission scores will see their financial results at stake, facing the accumulation of constraining regulations. We are also convinced that we will not be able to use all underground carbon reserves that are key assets of extracting companies and constituting a significant part of their valuation. This imply a risk of a potential discount on the market valuation of those companies Thus, we are proposing an investment solution that helps to significantly reduce the carbon footprint (above 50% of carbon footprint reduction) while achieving a reduced Tracking Error compared to standard indices (generally ranging between 0.6% and 0.7%).
Finally, other investors are focusing on precise investment themes in the SRI area such as green technologies or water treatment. Here, the portfolio manager needs to start by defining the eligible investment universe, in collaboration with extra-financial analysts. Then a specific care should be taken to the portfolio construction. Due to a frequent lack of benchmark related to the investment theme and the focus on a limited number of sectors, portfolio construction mechanisms derived from Smart Beta offer interesting solutions and added value.
Past performance is not a reliable indicator of future results or a guarantee of future returns.
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