2. Literature review
2.1. Sustainable investment globally
2.1.2. Investment strategies and firms’ best practices
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better investments in the actual economic situation (Polivka, 2013)
2.1.2. Investment strategies and firms’ best practices
In 2016, the GSIA gives a more technical definition of sustainable investment including the notion of portfolio management and selection. To properly manage a portfolio and select the ESG factors to include in, some strategies can be implemented: negative/exclusionary screening, positive/best-in-class screening, norms-based screening, integration of ESG factors, sustainability-themed investing, impact/community investing, corporate engagement and shareholder action (Global Sustainable Investment Alliance, 2018). The largest sustainable strategies, related to the assets value they manage, are negative screening ($15,023.26Bn), ESG integration ($10,369.01Bn) and corporate engagement and shareholder action ($8,365.29Bn).
Figure 1 : Strategies termination (GSIA report)
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Negative/exclusionary screening like other screening strategies is an avoidance strategy. It involves not investing in particular industries (such as alcohol, nuclear power, tobacco…), countries (such as countries in conflict, countries that do not respect human rights) and activities (such as gambling, animal testing,). To do so, databases from some software like Thomson Reuters or Bloomberg can be used to choose advanced filters showing only the assets respecting some predefined criteria.
The reasons for adopting this type of strategies are numerous. Firstly, you may want to avoid putting your money in assets or firms that do not match your values. Meanwhile, you can protect your reputation and be transparent to your shareholders (in the case of a fund manager).
Secondly, you may prefer to avoid some precise risks.
ESG integration strategy is the strategy using ESG criteria such as ESG score to decide rather or not investing in some stocks, funds, etc. When choosing to use ESG score on Thomson Reuters, three main categories are considered:
environmental, social and governance. These topics can be declined in several sub-topics:
resource use, emissions and innovation for the environmental component, workforce, human rights, community, product responsibility, for the social component and finally, management, shareholders and CSR strategy for the governance component. Then, when all the measures are compounded, Thomson Reuters attributes a grade ranged between A+ and D-. This score is
Figure 2: ESG score range, Thomson Reuters
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performance of other companies using a percentile score formula (Thomson Reuters, 2019).Hence, the objectives of an ESG integration strategy are as follow. Firstly, considering the increasing pressure on social and environmental factors, it can be interesting to have your portfolio covered by the risk of new regulations. Secondly, investing in a “niche” market (even if SRI can be less and less considered as a niche viewing their actual market value) and discovering underestimated assets can be lucrative. Thirdly, it is possible to focus only on sustainable investments that you can talk about to your relatives without being ashamed of participating in some unpopular activities.
The third most profitable strategy is corporate engagement and shareholder action. It differs from the others as it is applied by the firm. Individuals can only find out if the company follows this engagement and decide or not to invest in. This strategy aims to empower shareholders by letting them fill proposals presented after, to the board of directors. Then, it will discuss and add some key points on it during meetings. Thus, some proposals are co-written by shareholders and the board of directors. At the end of this process, shareholders vote for or against these proposals following ESG guidelines. This gives to the investor the unique opportunity to make a positive change from an ethical, green and strategic perspective. It also encourages more responsible business practices, including both the ESG and transparency parameters into consideration. Furthermore, it makes the company more attractive to all the investors seeking more transparency.
An increasing number of firms understands the matters of climate change and the associated risks. In the same time, an important number of potential and actual investors also understand
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them and asks for more transparency. Hence, different innovative CSR practices emerged during the past decades around the world (Strandberg Consulting, 2005)
The first important theme is the CSR strategy development. This includes the creation of a CSR department and training of CSR awareness in employees. This department is in charge of shifting a company’s mindset about sustainable activities from a cost to an opportunity for the future (minimize a risk category, use of resources, identify win-win solutions). Then, as the younger generations in developed countries ask for more meaning in their jobs, CSR can be used as a good incentive to attract new performant talents that would make the company more profitable.
The second theme is stakeholder’s engagement which means a transparent and sincere dialogue with them to, for example, select suppliers who target carbon neutral production activities.
Stakeholders for a company encompass customers, shareholders, suppliers, employees, local environment and authorities. All together can implement some innovative environmental and ethical policies that would benefit all of them.
The third topic to raise is competition across companies to get rewarded for their efforts in sustainable development. As an increasing part of firms have already implemented the ideas written above, some of them try to be ranked as leaders (best-in-class) by some environmental institutions or NGOs to differentiate themselves from their competitors. This practice is interesting as long as these efforts do not just fit the exigencies of some kind of CSR “award”
and are made in the purpose of attracting some new investors or customers, but rather in a long-term time horizon perspective.
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The same reasoning for entities involved in some charity programs can be applied. Nestlé will be our example to underline this point. The group suffered from many scandals since its creation (Smith, 2015) and even more with the development of social media. While going on Nestlé’s website ( (Nestlé, 2019), in the CSR tab, this statement can be found: “Nestlé promotes nutrition education and physical activities among school children in rural areas through the Nestlé Healthy Kids (NHK) program and the Knowledge Sharing (KNHK) program. We have also set up purified drinking water tanks and sanitation facilities for girls in village schools to support the continued education of children”. But in another part of the website, the “Ask Nestlé”, a question is asked about child labor in the cocoa plantation in Ghana and Ivory Coast. This question was asked in 2017 and may be due to the child slavery scandal for which a lawsuit was filed against the group in 2012. Even if Nestlé does not own the plantations, it was accused of “tacitly supporting child slavery” and “violating its own labor code” by the Fair Labor Association (FLA). The answer to the previous question is not conclusive: “No company sourcing cocoa in Ivory Coast and Ghana can fully remove the risk of child labor in its supply chain”. Then, in the rest of the answer, Nestlé explains its actions to tackle child labor in the cocoa industry (building schools, cooperation with NGO and associations, reports to local authorities). This example is one of the numerous that can be found concerning firms, but also banks, insurances companies, financial intermediaries which adopt a strategy of “green-washing” to satisfy the public opinion (Giraud, 2019). Thus, it is capital to differentiate best practices for sustainable finance and green-washing marketing strategy.
Last but not least, best practices can have similarities and differences across entities such as banks, financial services, asset management and insurance companies. Raising awareness about SRI education to employees, students and customers is one of the key best practice that can be
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encountered in every financial related structure. Indeed, education is always the key to change.
Therefore, some customs are also specific to each entity. Insurances companies begin to assess public risks such as health, pollution, climate change, etc. while asset management firms invest in high social and environmental projects. Banks establish sustainability screens on their portfolio and create new concepts such as “smart growth”.
To conclude, strategies for investors and best practices for companies emerged in the near past and more innovation can be expected in the coming decade (Strandberg Consulting, 2005).
Even though finance remains the most reluctant sector to operate the necessary changes for the ecological transition, many actions appear from the different actors involved thanks to a global wake-up call. Sustainable investment is one of the key ways to drastically modify our economy and is particularly present in Europe.