Personal-Financial.com: Mr. Berranger, since it was founded in 1991, La Financiére de l’Echiquier (LFDE) – with currently managed assets of around eleven billion euros, has been one of the pioneers in sustainable investments. What do you attach particular importance to?
OLIVIER DE BERRANGER: We have been looking for undervalued stocks for over 30 years. Good corporate management, i.e. governance, was a very important point for us from the start. The G in ESG is kind of a founding pillar of our company.
And how did it go on?
In 2007, before the global financial crisis, it became clear to us that we needed another pillar in our investment process. Since then, we have applied our ESG approach before investing in a stock or corporate bond. Every company in one of our funds has an E, an S and a G rating. We always carry out this process, even if we don’t specifically designate a fund as sustainable. ESG is simply part of risk management and the assessment of non-financial risks. In addition, we have an official seal for ethical investment, so-called SRI investing, for around 40 percent of the investment funds we manage. We have the Belgian, German or French SRI seal for some funds. Three years ago we went one step further and launched one of the first funds for impact investing, whose investments pursue certain goals such as reducing carbon dioxide emissions.
If you screen all companies according to ESG criteria anyway, what is the difference between the various levels?
At the beginning there are exclusion criteria. All of our funds do not invest in so-called controversial weapons, tobacco and the extraction of steam coal. If it is an SRI fund, there are other exclusion criteria such as fossil fuels, gambling or alcohol. In addition, we do not invest in companies that do not comply with the UN Global Compact, an agreement between companies and the United Nations to globalize social and ecological goals. In the Echiquier Positive Impact Europe Fund, we have a minimum rating of E, S and G on the third level. Here, companies must also generate at least 20 percent of their sales with products and services that meet the UN goals for sustainable Serve development.
Tobacco excludes a great many ESG investors. What is the relationship between ESG and smoking a cigarette?
The link is the global cost of smoking-related diseases and the adverse health effects of many people. Without tobacco, human health would be better – and that’s a good reason for excluding it.
Tobacco is one of the so-called sin stocks, that is, stocks of companies that earn money from people committing sins in a moral sense – smoking, drinking alcohol, gambling or consuming pornography. Will such stocks be bought at all in the future?
To do this, these companies must commit to change and behave better towards their customers. I am sure that in five or ten years’ time it will no longer be possible to invest any type of money active on the stock exchange with gambling providers. In addition, some of the companies will no longer be listed on the stock exchange and will be held privately.
What about oil companies?
There are a number of oil production companies that are expanding their renewable energy activities. That is exactly what we want to achieve, namely lower CO2 emissions. If a company gets 70 percent of its sales from oil and gas, we don’t invest in it. But once it’s a wind or solar energy company, we’ll buy that stock again.
When you make an investment decision at LFDE, how do you weight the three factors E, S and G? Do you make compromises, for example with a company that has the technology to solve global climate problems, but is quite corrupt, i.e. has a high E but a miserable G value?
It is difficult for a corrupt company to break into the group of companies that ESG investors can invest. For us, governance has the greatest weight in the assessment with a share of 60 percent of the ESG rating, the rest, roughly speaking, relates to environmental and social issues. Our experience shows: If a company is well managed and scores high for its governance, it also scores better when it comes to criteria such as its impact on the environment or its relationships with suppliers and employees. It is very rare for good governance to go hand in hand with poor environmental and social behavior.
If companies are managed better, then they must also have better performance. Is that why sustainable investments tend to generate better returns?
A good G value does not necessarily mean better management, but it generally means better alignment with the interests of all parties involved. A well-run company usually has fewer problems with environmental issues or its employees; it is usually less risky. To take an example: we were not invested in Wirecard for governance reasons. Other than that, the business model just didn’t understand.