What is SRI?
Definition
Today there is a range of differing terms to describe more sustainable investment, including ‘green’ ‘ethical’ ‘socially responsible’, as well as ‘sustainable and responsible’ investment funds, yet they all circle around the core characteristics of:
Long-term oriented investments combining an investor’s financial interest with their concerns about environmental, social and governmental (ESG) issues. – European Social Investment Forum, 2010
Selection Criteria
There are various methods used by SRI funds to integrate ESG goals into their investment potfolio. Most rely on a combination of positive and negative screening as well as other procedures such as engagement policies or the explicit integration of ESG impact in their financial analysis. Below glossary of important terms.
Positive screening: The selection, within a given investment universe, of stocks of companies thatperform best against a defined set of ESG criteria. This may include Best-in-Classor SRI theme funds for instance.
Best-in-Class: Approach where the leading companies with regard to ESG criteria from eachindividual sector or industry group are identified and included in the portfolio.(Subset of positive screening).
SRI theme funds: Thematic funds may focus on sectors such as water or energy, or issues such as thetransition to sustainable development and a low carbon economy. To be consideredSRI, a theme fund must show an explicit SRI motivation, taking into account ESGconsiderations in the fund construction process. This requires the existence ofspecific mechanisms, such as the involvement of SRI expertise in stock analysisselection, the application of an ESG screen, or the management of the product bythe SRI team. (Subset of positive screening).
Values-based exclusions: This refers to exclusions where more than two negative criteria/filters are applied(as opposed to just tobacco or weapons for example).
Norms-based exclusions: Negative screening of companies according to their compliance with internationalstandards and norms such as issued by OECD, ILO, UN, UNICEF, etc.
Simple screening: An approach that excludes given sectors or companies from a fund if involved incertain activities based on specific criteria, such as arms manufacture, publicationof pornography, tobacco, animal testing, etc.
Engagement: A long-term process of dialogue with companies which seeks to influence companybehaviour in relation to their social, ethical and environmental practices.
Integration: The explicit inclusion by asset managers of ESG-risk into traditional financialanalysis. Corporate Governance risk should be limited here to the interface betweenGovernance and Social and Environmental issues.
