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An X-ray of socially responsible investing

A socially responsible investor is someone who takes ethical, social and environmental considerations in its investment decisions. Without compromising the profitability of the investment, the responsible investor seeks to create long-term value, supporting businesses that can bring benefits to society. Although institutional investors are the most active in this type of investments, based on the interest shown by millennials, the investment opportunities in the segment could very well lead to wealth transfers of over 4% of the world’s GDP by mid-century.

How does SRI work?

Socially responsible investing (SRI) aims to offer options to more socially and environmentally aware investors. It draws on the premise that a company’s practices can provide a solid basis to judge the quality of its procedures, and whether it is fit to manage potential risks and opportunities in the long-term.

For this purpose, investments are classified according to three criteria (the so-called ESG criteria), which gauge a company’s relationship with the environment (E), society (S), and good corporate governance (G).

The level of importance granted to each factor depends on the sector to which the company belongs. In the financial industry, the most sensible variables are those that have to do with correct practices with customers and suppliers, corporate governance and relationship with society (which also includes the level of employee satisfaction), aspects in which BBVA stands out among its competitors.

Who can invest in SRI funds?

Socially responsible investing is relatively recent, although its growth, especially in the last few years, has been exponential. Based on the data published by the Global Sustainable Investing Alliance (GSIA), by the end of 2014, SRI funds managed over US$21 billion across the world, with a growth rate of 61% compared to 2012 (GSIA publishes the report every two years).

Any investor (whether institutional or individual) can be socially responsible. However, this type of investors does not seek high yields in the short-term. Socially responsible investments favor sustainable profitability ratios in the long-term.

So far, SRI fund growth is driven by major institutional investors (mainly French and Nordic). However, as millennials start pouring money into the market (younger investors more predisposed to combine returns with social and environmental benefits) we should start seeing increasingly higher ratios of individual investors.

Most of the large institutional investors already employ analysts specializing in SRI, who issue reports on ESG variable compliance and fulfillment by the companies they monitor. However, investors that do not have access to this type of analysts take as reference the scores of specialized rating agencies, such as RobecoSAM, MSCI, Vigeo y Sustainalytics.

The ratings issued by these agencies are also crucial when determining the so-called Sustainability Indexes, which take into account a selection of companies that have an especially outstanding performance in SRI related matters.

The inclusion in one of these indexes and the rating obtained can be a determining factor for an investor at the time of making a decision with respect to a specific company. The Dow Jones Sustainability World Indexes (DJSWI), MSCI World ESG and FTSE4Good are some of the most influential indices.

BBVA, is one of the Spanish companies included in the RobecoSAM Sustainability Yearbook 2016. RobecoSAM is the agency responsible for assessing the induction of potential candidate companies into the Dow Jones Sustainability Index.

Likewise, BBVA has created a synthetic responsible banking index thanks to which it can render benchmarks of ESG performance by different companies. During the 2012-2014 period, BBVA has climbed from third to the no. 1 spot in the ranking when compared against a group of 19 European banks which are its direct competitors.

Types of socially responsible investments.

Traditionally, SRI activity has been driven by decisions from specialized investors on whether to invest or not on a company or thematic fund targeting sustainable development goals or sectors.

The criteria analyzed when considering socially responsibility investments have been gradually integrated into broader investment decisions.

The most common formula is the exclusion approach, which rules out investing in certain companies or sectors which fail to meet or are contrary to socially responsible investment criteria.

On the other hand, the integration of ESG criteria into the set of variables juggled in classic investment management strategies (complementary to traditional profitability, liquidity and risk criteria) is becoming increasingly frequent.

Other SRI strategies are “best in class” screening, ESG screening based on international standards, thematic funds, engagement or voting and impact investments.

 

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