Socially responsible investing

About Fédéris Gestion d’Actifs

Fédéris Asset Management is a management company in the sector of social economy, managing EUR 28.4 billion in assets as at March 31, 2015. Backed by a team of 48 employees and owned by Malakoff Mederic (a leading French social protection group), Fédéris Asset Management services insurers, welfare institutions and mutual health companies, offering a comprehensive management capacity including different expertise areas.

Journal: To get started, please describe Fédéris and its business activities in the context of SRI.

Anne Courrier: Fédéris is an investment management company in the social economy sector, managing EUR 26 billion in AUM for our client base of insurers, welfare institutions, and mutual health companies. 80-85% of our AUM are placed in bonds and the rest in equities, which is where we offer the majority of our SRI products. We launched our first SRI equities fund in 2003, giving us more than a 10 year track record. Since then, we have expanded our SRI offering progressively into different kinds of funds and asset classes. Even for those funds that are not pure SRI, 20% of the investment scoring of stock selection is still based on SRI-related criteria, while 80% is based on regular financial data.

Journal: So Fédéris was one of the first movers in SRI, what led to the decision to invest responsibly?

Anne Courrier: When Fédéris was established, the drive for SRI arose both internally and externally. Many of our first clients wanted their investments to be managed responsibly, while internally, the founders had a similar desire, so this trend has simply grown with the company ever since and is very much wrapped up in our identity.

In today’s market, we are seeing a trend of major institutional investors requiring SRI management of their funds. As an example, Fonds de Réserve pour les Retraites and ERAFP are two major French institutional investors who apply strict SRI rules to their offerings and require systematic SRI management of their mandates. As a result, we are seeing more and more institutional investors build SRI management into their RFPs.

… we are seeing more and more institutional investors build SRI management into their RFPs.

Journal: Fédéris has an approximately 80-20 split between bonds and equities, is it possible to invest responsibly in both asset classes?

Anne Courrier: More often than not, SRI is carried out in equities, instead of bonds. In many ways it’s easier with equities because investors can actually vote and have their voices heard – the same is not possible with bonds and the governments that issue them. Nevertheless, we apply the same kind of rules and scoring to both equities and bonds to help form our investment decisions.

Journal: How would you define SRI? Is there one definition, or many?

Anne Courrier: People often put everything under the term SRI, which leads to some confusion over client expectations. In my view, there are two major categories.

Firstly, there is what I call value-driven SRI. This is when an investor wants to invest in companies that have some common values or behavior that they are comfortable with. If this is the central reason for investing responsibly, then the investor shouldn’t expect any special financial returns. Take nuclear energy for example, investor A can say that nuclear energy is bad because it produces radioactive waste that we cannot manage, while investor B can say that nuclear energy is good because it reduces CO2 emissions. Both are right, meaning that if investor A excludes nuclear from their portfolio, and investor B includes nuclear in their portfolio, both cannot be right on the financial aspects at the same time. So you can’t say that because it’s good, it will also pay.

Nuclear energy: A value-driven or financial-driven SRI investment?

If you are an investor with those beliefs and come to an asset manager saying that this is what you believe and this is where you should invest, and shouldn’t, then my responsibility as an asset manager is to build the portfolio that responds to your requirements. And also to show you whether your choices contribute positively or negatively to your portfolio, but the choice of criteria remains yours.

Journal: And the other category?

Secondly, there is financial-driven SRI. This is when investors use SRI-related criteria as supplementary data to help select the best companies from a risk-return perspective. Asset managers all have similar financial data on companies, but by taking extra financial considerations into account, I believe it helps us select the best company from a pure financial point of view, without bringing any value-based investing into it.

Waste management, health and safety conditions, training and career development policies, energy consumption, and executive's salaries transparency are some example of extra-financial criteria that we think have an impact according to our research. We believe that they have a positive impact on the financial performance of companies who apply them. We use 45 such criteria, but there are several hundred available in the databases from SRI rating agencies.

This style of SRI management does not attempt to choose between right or wrong from a value-based perspective, but rather uses the additional data to enhance your investment decisions. For example, we are looking to see whether there is evidence that the presence of female directors on Boards or the amount of money you invest in employees impacts the financial performance of a company and boosts investment returns. These findings can then become a core feature of our scoring tool/system.

We believe adding this kind of extra data can drive financial performance, and we constantly try to fine tune our scoring criteria to give us a competitive advantage. Furthermore, we try to link the SRI-related criteria to the level of risk-return of an investment.

If you invest based on personal values, maybe you gain, maybe you lose. But as long as you accept that, then it’s fine. But in terms of improving investment performance we like to combine as many criteria as possible to give investors the choice and return they want.

Journal: Do all firms have SRI offerings? What are others in the industry doing?

Anne Courrier: While SRI is a growing trend, most firms do not have the internal analytics capacity that we do. For example, we are counseling a firm that manages convertible bonds. They have no expertise or experience within SRI, so they asked us if we could provide that. They sell their funds in Switzerland and Germany and their investors were asking for a certain ethical exclusion list. So we said ok, we can do that. First, we excluded everything the investors wanted and showed them what it would cost/add to the fund. Second, we applied our own tools and selection to fine tune the list to show what additional SRI criteria could add to the portfolio.

We have such strong capacity in this field that we can show clients the potential performance of their investments if they don’t want anything with alcohol, gambling, weapons, etc. and then compare it with Fédéris’ own performance when financial criteria is also integrated.

Journal: What role does SRI have on your business model?

Anne Courrier: I believe that SRI adds to our company’s identity, but I don’t believe that it is where we sell funds. Our first SRI fund was released in 2003 and was a European equities fund. Even to this day, it remains one of our most popular funds, mainly because the financial return has been very good. The fact that it is SRI is just the cherry on top. Having said that, we do actively try to introduce SRI funds where possible. It is important for our historical client base, but is not the core reason why we attract new clients.

Journal: Does Fédéris have a formal SRI strategy in place?

Anne Courrier: We have never established a formal SRI strategy and have instead focused on having a best-in-class approach. Gradually, we are introducing formal exclusions, but it’s limited to specific items such as weapons, fiscal noncooperation, corruption, human rights, pollution, and audit (complaints). If a company scores badly in one of these areas we believe they represent a risk. Our SRI strategy is more of a risk mitigation approach and we assess those ratings every 3 months.

Journal: Is it a challenge to Fédéris to manage investments responsibly?

Anne Courrier: One major challenge is making clients understand what we are doing and what they can expect from an SRI strategy.

If we have made a decision not to invest in companies that receive a low ranking from our scoring system, then our portfolio managers need to respect that. From time to time, they want to buy equities based purely on financial reasons, but they cannot because the SRI ratings are not good enough. Firms need to be consistent in their strategy and not change whenever an opportunity for a short term gain pops up. Firms need to stick to their convictions.

It’s also expensive to have access to SRI-related ratings. Not only do you have to pay for standard financial data, but also the SRI-related information on top of that. We are always trying to improve our internal attribution to differentiate what comes from SRI data and what comes from standard financial data, plus a lot of work with raw data. For each portfolio we work with, we provide clients with the average effect on job creation, or carbon emissions, etc. That’s huge work, making it a demanding and expensive process.

Journal: What about more general challenges within the industry?

Anne Courrier: One of the major challenges, as I see it, is the effort under way to bring more clarity to the market. There are a growing number of initiatives in Europe, and abroad, to have a certification program qualifying what SRI is, and isn’t. Because there are so many different kinds of SRI depending on the individual views of investors, it may be a challenge to be so black and white.

Having too narrow a definition could risk having everyone end up doing the same thing to be compliant with the programs, and that would be a shame.

It’s important to discuss with investors (individuals and institutions) on a case-by-case basis and have them express what is important for them and what they want reflected in their investments.

… It’s important to discuss with investors (individuals and institutions) on a case-by-case basis and have them express what is important for them and what they want reflected in their investments.

Journal: Data plays a big role in SRI. How does Fédéris go about using SRI-related data when investing?

Anne Courrier: We recently started working with an agency providing raw indicators, such as CO2 emissions, job creation, % of budget to learning and development, etc., and we use them to assess what is in our portfolio. Fédéris also uses three other agencies, and then an internal team to analyze the different research.

Journal: How do you prove to your clients and regulators that you are complying with your stated SRI objectives?

Anne Courrier: Reporting plays a very vital role in SRI management. Being compliant with our own strategy and regulation is a requirement and we need to be able to prove to clients that we do what we say, and that we are transparent in terms of following our own guidelines.

We have official descriptions of our funds, and every ratio and engagement we write about must be respected, so our compliance team follow up on this to ensure what we say in our commercial documentation, is what we are doing in practice. The major institutions we are managing money for, they have environmental, social, and governance (ESG) policies and they also want to know that their money is being managed according to those policies.

Journal: What role does your IT system play in terms of SRI?

Anne Courrier: Our IT system plays a very important role in SRI management. As mentioned, we need to integrate a lot of different data from different sources as well as be able to create detailed reports tracking our compliance. These vital elements can be taken care of with our IT system, and because we want to continuously improve our processes, ratings quality, and investment performance, we use our IT system to drill down to monitor as much as possible. We want to understand the different details and layers concerning performance contribution, so that we can assess what is coming from SRI and what is coming from traditional financial numbers. Not many firms do it to the level of detail that we do.

… Our IT system plays a very important role in SRI management. As mentioned, we need to integrate a lot of different data from different sources as well as be able to create detailed reports tracking our compliance.

Journal: Does Fédéris have any competitive advantage in the market thanks to its SRI angle?

Anne Courrier: You may have seen that Fédéris is in the process of being acquired by La Banque Postale Asset Management. One of the reasons (among many) they were interested, was our SRI expertise, and the opportunity for them to take advantage of our 17 years of experience working with SRI.

For me, this reassures me of the importance and value of SRI, but also of the fact that Fédéris has a reputation as an honest and transparent asset manager. SRI means that you have higher expectations of those companies you invest in. In turn, it also means that you yourself need to be equally responsible as a firm and follow the same requirements that you impose on other companies.

Journal: Finally, what does the future hold for SRI? Will it continue to grow in popularity? Or is it a short-term trend?

Anne Courrier: SRI seems to continue growing as a trend and I am of course happy to see it grow. You can no longer say that it’s ok to make money and run, even if that money is made from companies that use child labor or are serial polluters. You can’t do that anymore, and people are gradually realizing the importance of being responsible towards every stakeholder. We believe that SRI-related data can help us find the most attractive investments in firms that are committed to the long term future.