23 May 2012

Responsible Investing : present situation

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Xavier Heude

The annual ALFI conference on « Responsible Investing » was held on the 8th May in Luxembourg. A premium meeting point between professionals, but also researchers or any other actors pushing responsibility in front of the scene.
We report below the highlights of this event.

Insight into Investors’ Needs

It was the topic of the first panel of the day, that gathered some major European players : Sparinvest, Triodos and responsAbility.

Klaus Tischhauser, co-founder and CEO of responsAbility itemizes investors in 3 categories : Private, Institutionals and Distributors.

  • private investors want to make good, while therefore preserving their capital. The emotional component of the investment counts much for them
  • institutional investors look rather for capital growth and diversification. Additionally, responsible investing is seen as a way to build a positive reputation
  • distributors seem to use the product as a mean for differentiation and positioning. On top of this, they are particularly cautious of selling products which are compliant with the regulation.

Beyond their diversity, these 3 categories of investors share common expectations :

  • liquidity (as it relates mainly with non-listed companies)
  • transparency (about the conditions to invest, risk, etc …)
  • focus in the real economy (i.e. create benefits for someone, that can be clearly identified)
  • simplicity (the financial operation and investment process must be easy to understand)
  • traceability (i.e. following where does the money come from and go to ?)
  • involvement (i.e. to be close to the investment) and emotion … both being linked
Social and Environmental Impact

This panel started off with a general question : Are we entering into a new industrial revolution ?
According to Alain Kinsch, CEO of Ernst&Young, Luxembourg, the worldwide oil consumption between 1990 and 2010 was higher than the consumption registered since oil has been discovered !
He added  :” either the humanity changes, or we invest hugely in renewable energy and technologies”. Needless to say that the second option is almost likely to occur. As a  result, there will be room for massive investment in new technologies.
The private-equity industry should play a leading role in this perspective. Alain Kinsch gave a snapshot of the global private-equity sector, with pointing out that energy efficiencies are much more attractive than renewable energies. He highlighted also the need for more transparency.

The right balance between financial and social-environmental results was discussed. In the area of responsible investing, investors usually care where their money is used, but the thorny question about the trade-off is never far away. According to Uli Grabenwarter, from the European Investment Fund, if the social and environmental impact is integrated in the product design and strategy, …. we come up to a positive correlation  between the financial return and the other cited ones. By comparison with SRI – Socially Responsible Investment, impact investing not only avoids harm on social / environmental side, but generates a positive impact.
Maybe, the true question should be : are ESG a risk factor or an opportunity offer for investors ? Maybe both …

Justice rather than Charity

The conference included a reflection on Ethics and Investing from a religious point of view, with the Reverend  of the Anglican Church in Luxembourg. His speech was quite inspiring. The following ideas were exposed :
– solutions to social and environmental issues are often leaved to the NGO sector, but charity has its own limitations. It diminishes dignity of the beneficiary and reduces his self-esteem and confidence, which finally does not give him the power to change
– referring to microfinance, the Reverend recalled the need to help people participate in the economy
– “to much efforts is made for charity … and too few for justice”, he said.
According to him, “change takes place when we go in the fine detail of the daily life”.

As a conclusion, Responsible Investing still stumbles over a lack of definition, resulting in a great distortion of understanding what it really overwhelms. We might hope that investors would have more appetite, if they were better informed and advised.
The definition of what is a responsible investment definitely ranks on the top of the agenda now.

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