Socially Responsible Investment in France

Abstract

Socially responsible investment (SRI) in France is based on a “best in class” approach as opposed to the “exclusion” approaches used in other countries such as the United States or United Kingdom, where the rejection of sin stocks has been dominant historically. The objective of this research note is to examine whether the French SRI market, by focusing more on financial rather than on ethical considerations, compared with other countries such as the United States, the United Kingdom, or even Sweden, may lead to a form of “mainstreaming” of SRI processes. The authors explore several convergent mechanisms. First, the authors analyze the importance of the mainstreaming issue in the history of SRI as well as in the contemporaneous debate in the academic literature on the links between financial and extrafinancial (SRI) performance. Second, the authors review the role played by ethical finance laws adopted in France in the early 2000s in the development of the SRI market. Finally, the authors discuss the results of a survey of French SRI analysts working both for large institutional investors and asset managers in France in 2009.

Keywords

socially responsible investments France mainstreaming asset management ESG performance

In the United States or Europe, up to one dollar out of nine incorporates a socially responsible dimension that considers not only financial performance but also extrafinancial performance criteria in the investment decision process (European Fund Asset Management Association, 2008; European Sustainable Investment Forum [Eurosif], 2008; Social Investment Forum [now U.S. SIF—Forum for Sustainable and Responsible Investment], 2008). Consequently, the potential impact of socially responsible investment (SRI) decisions on firms’ nonfinancial policies and performance can be a very powerful mechanism to influence business practices. The evolution of SRI markets is therefore an important issue for business ethics and corporate social responsibility (Scholtens, 2006). In most industrialized countries, SRI has tended to grow from a niche market of individual ethical investors to embrace institutional investors (e.g., pension funds) resulting, for instance, in the United Kingdom in £764 billion in assets under management (Eurosif, 2008; see Lewis & Juravle, 2010).

Considerable attention has been given in the academic literature to the issue of SRI performance. According to the “doing well by doing good” argument, by relying on sound ESG (environmental, social, and governance) risk management, SRI strategies would positively impact performance. In contrast, according to the “whatever is better is worth a premium” argument, imposing nonfinancial screens reduces diversification, thereby adversely affecting performance. Despite many years of academic studies, no consensus has emerged so far on whether corporate social responsibility (CSR) leads to superior financial performance. (For a review of results from these empirical studies, see Margolis & Walsh, 2003; Margolis, Elfenbein, & Walsh, 2007.)

In turn, rather than focusing on SRI outperformance or underperformance, a growing number of studies have recently started to document the varieties of practices and principles of SRI in different countries. One striking feature of these studies is that, relying on a historical and social movement perspective, a common trend seems to characterize the history of many different markets, in particular Anglo-Saxon, Scandinavian, or Continental European, namely, the transition from niche funds to broad-based SRI (Arjaliès, 2010; Bengtsson, 2008; Louche & Lydenberg, 2006).

This research note contributes to this literature on sustainable finance by presenting an overview of SRI in France and discussing whether SRI is becoming “mainstream” in this specific market. This so-called mainstreaming movement refers to the fact that traditional actors of the asset management (AM) industry would integrate into their analysis and decision-making processes the ESG criteria formerly only produced and used by SRI actors.

Although research on comparative national varieties of SRI has received an important attention in the literature, only a few papers focus on the French SRI market (see Arjaliès, 2010; Déjean, Giamporcaro, Gond, Leca, & Penalva-Icher, 2013; Eurosif, 2006, 2008; Louche & Lydenberg, 2006).

Hence, the value-added contribution of this research note for the literature on SRI is twofold. First, it contributes to the understanding of national varieties of SRI by gathering observations from the French market structure and legislation, as well as from the perceptions of some French SRI analysts themselves. Second, relying on the French example, it contributes to the debate on nationally idiosyncratic, socially responsible investing regarding the issue of SRI mainstreaming.

This research note is organized as follows. We first document the importance of the debate in the academic literature on the links between financial and extrafinancial performance for the issue of SRI mainstreaming. We then examine the specificities of the French SRI market, namely, its recent evolution and the role played by ethical finance laws adopted in France in the early 2000s. The research note finally reports the results of a field survey of French SRI analysts.

SRI Mainstreaming: History and Literature Review

Brief Historical Insight into SRI Funds

The history of socially responsible investment in Europe and in the United States offers interesting insights into the mainstreaming of SRI processes.

Ethical funds appeared in the United States in the 1920s, relying on the religious values of their promoters—religious congregations—and excluding firms belonging to the alcohol, gambling, pornography, tobacco, and weapons sectors. Socially responsible funds developed in the 1960s, relying on the moral values, not necessarily religious, of their promoters—trade unions, nongovernmental organizations (NGOs), and consumers associations—and applying selection criteria based on human resources, environment, and product quality. Unlike ethical funds or socially responsible funds, sustainable development funds developed since the 1990s on the basis of an analysis of long-run performance and sustainable growth. (The reader should see the description of the history of SRI in Reference Louche & Lydenberg, 2006.) These sustainable development funds apply selection criteria with an objective of a long-run return associated with lower volatility. They target pension funds and may embed shareholder engagement, suggesting that the mainstreaming of SRI into conventional financial analyses could become a key point to promote sustainable development goals on financial markets.

Hence, the past two decades tended to witness a shift from an activist SRI movement to a commercial project (Louche, 2004), and SRI is no longer restricted to ethical funds but rather involves a mainstream investment strategy (McCann, Solomon, & Solomon, 2003).

In this retrospect, European markets deserve close attention. Not only do the assets under management with extrafinancial criteria grow rapidly and already represent several dozens of billion of euros, but also the conventional funds which admittedly refer to these criteria continuously increase (Novethic, 2009a).

More fundamentally, unlike Anglo-Saxon countries where SRI originally developed for ethical reasons, SRI in Continental European countries has followed a financial approach based on the development of positive screening methods relying on extrafinancial—environment, social, and governance—criteria (Déjean, 2006).

The French asset management industry is one of the largest in the world with assets under management exceeding €2.6 trillion at end of December 2010. France’s SRI market is of particular interest as it is the most dynamic and successful in Europe (Eurosif, 2008). Moreover, the development of the French SRI market was mostly based on “positive” or “best-in-class” approaches consisting in selecting the most socially responsible companies whatever their sector (Arjaliès, 2010) and explicitly aiming at diffusing to the conventional asset management sector (Europlace, 2008).

SRI Mainstreaming in the Literature

The rapid growth of sustainable investments and the shift in SRI from margin to mainstream has been documented recently (Louche & Lydenberg, 2006; Schueth, 2003; Sparkes & Cowton, 2004).

From a theoretical perspective, examining the mainstreaming of SRI processes is rooted in the abundant literature on the links between financial performance and corporate social responsibility (see Capelle-Blancard & Monjon, 2012; Margolis, Elfenbein, & Walsh, 2007; Mercer, 2009; UN Environment Programme Finance Initiative [UNEP-FI] & Mercer, 2007).

This literature focuses on the trade-off between different types of performances. One possibility is that environmental or social performance improves to the detriment of classical financial performance, for instance, measured by shareholder value creation. Another possibility is that both types of performances are correlated, in the short run, or at least in the long run.

Despite the considerable attention devoted to this issue in the academic literature over the past decades, no consensus has emerged so far. A brief comparison of SRI indices and conventional stock market indices does not reveal underperformance or superior performance. For example, Figure 1 represents one of the leading SRI indices, the “ASPI Eurozone” relative to the Dow Jones Euro Stoxx.

Figure 1.

Compared performance of ASPI Eurozone and Dow Jones Euro Stoxx Indices.

Analyzing the “mainstreaming” of SRI decision processes offers an interesting and novel contribution to this debate. In fact, following a mainstream strategy may mean that extrafinancial criteria at the root of SRI would be considered as additional means to obtain a higher financial performance (Azoulay & Zeller, 2006). But then, because it is valuable, it seems consistent to assume that there is a price to pay—perhaps in the form of underperformance—to socially responsible investing (Voisin & Jeaneau, 2010).

In turn, observing a convergence between SRI and traditional asset management leads to reframing the question of SRI performance. Convergence implies both that SRI criteria are perceived by investors as leading to higher financial performance and that because it is valuable, there is a price to SRI.

The economics literature raises another important argument related to the costs of corporate social responsibility and the conflict of interests between shareholders and managers and the objective functions of both parties. Simply stated, this literature raises the issue of at which level CSR should be implemented and who should bear its cost. CSR might be the initiative of CEOs or of shareholders. In other words, the literature raises the question of who should best be in charge of corporate social responsibility.

For Friedman (1970), the social responsibility of business is to act in the name of owners (shareholders), that is, to ensure firm profitability: “to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” If managers spend corporate resources in a different way than stockholders would expect, they are in fact imposing taxes on shareholders and deciding without legitimacy how this tax revenue shall be spent, whereas nobody has the legitimacy to tax or substitute oneself to an elected government in charge of public goods. In this approach, managers and shareholders are in an agency relationship in which shareholders own the firm capital and act as principals toward managing directors, who act as agents whose duties are to serve the principal’s interests. If shareholders wish to pursue social goals, they should do so by spending their own revenues rather than through corporate social responsibility.

More recently, Cespa and Cestone (2007) show that leaving CSR in the hands of managers may favor the emergence of an entrenchment strategy for the least efficient ones. The key argument is that referring to nonfinancial performance metrics may lead to undue justifications of any kind of decisions and a lack of financial performance. To increase the value of investing in the corresponding firm, shareholders thus should take in charge CSR issues: They should invest in SRI, to prevent such entrenchment strategies. In this view, SRI mainstreaming could take place.

For Baron (2009), consumers’ warm glow preferences for personal giving to social causes can help reconcile managers and shareholders’ interests. Indeed, such warm glow preferences motivate managers to adopt CSR strategies, without imposing costs on shareholders. Strategic CSR therefore is not incompatible with shareholder value maximization. In this view, SRI may exist as a niche market, targeted toward consumers caring for social causes.

Accounting for social responsibility within asset management then becomes a real challenge concerning whether CSR criteria should be left to specialized funds designed to niche markets (mutual funds, pension funds with social objectives, etc.) or could add value to conventional asset management, mainly relying on traditional strategic and financial analyses. In other words, a key empirical question is whether SRI will converge toward mainstream asset management or whether both types of asset management will continue a kind of parallel trajectory for clearly segmented clients and investors.

Is SRI Becoming Mainstream in France?

The evolution of the French market offers interesting insights into this debate. First, to develop the specifics of the French SRI market and examine the relevance of SRI mainstreaming in this context, we present a brief overview of the market size and legislation in France. Second, we report the results of a survey conducted on some French SRI analysts, and which offers an original perspective

SRI in France: Market Size and Legislation

The French market for SRI amounted to €30 billion in 2008, including €22.5 billion for institutional investors (Novethic, 2009a).

In this market, there are many signals showing that an increasing number of French mainstream investors (“traditional” investors usually only focused on financial performance) are now integrating SRI criteria, into their so-called SRI funds and their conventional funds as well. In particular, in 2009, 63% of the French conventional funds in terms of assets integrated at least one SRI criterion. In contrast, the “pure” SRI funds themselves represented only 2% of the assets under management (Novethic, 2009b). So even if this segment remains limited, the influence of ESG criteria on asset management goes far beyond SRI funds.

Several laws starting in the late 1990s played an important role in the development of long-term investing and SRI in France and may help explain the emergence of SRI mainstreaming in this context. The same enactments have occurred in many Organisation for Economic Co-Operation and Development (OECD) countries (see de Brito, Desmartin, Lucas-Leclin, & Perrin, 2001; Scott, 2001).

The first set of laws directly promoted long-term investing and SRI on the French market. In 1999, the French government created (with the decree of July 2001) a Pension Trust Fund (Fonds de Réserve des Retraites or FRR) whose main objective was to introduce some public funding in the “pay as you go” basic pension scheme to cope with its expected financial nonsustainability within the next decade. More precisely, the FRR has been granted a dedicated SRI policy: its “responsible investment” strategy in fact explicitly encourages mainstream investment managers to adopt responsible investment practices, and relies on SRI mandates that integrate ESG (environmental, social, and governance) issues into investment decision making and portfolio management. The creation of the FRR in turn explains to a large extent the entry of mainstream actors in the French SRI market. Indeed, in 2005, the FRR put out a request for proposal that included several mandates for investment managers with expertise in SRI. The 5-year mandates are for European equities and to an aggregate sum of US$800 million. The mandates required the integration of ESG issues into investment decision making on a best-in-class basis (see UNEP-FI & UK Social Investment Forum, 2007).

The corresponding rise in the demand for SRI induced by the FRR’s SRI policy was accompanied by the “Fabius law” of February 2001 (institutionalized by the “Fillon law” on pensions of August 2003). These laws established a “voluntary partnership employee savings scheme” (Plan partenarial d’épargne salariale volontaire or PPESV) with the sums invested frozen for a 10-year period (as opposed to the 5 years in the usual employee savings scheme) thereby developing a long-term perspective on savings and thus on SRI demand.

This rise in demand on the SRI market was also confirmed by the creation in 2001 of the Comite Intersyndical de l’Epargne Salariale (Committee of the Inter-Union Employee Savings or CIES), which provided a trade union “SRI label” to a range of SRI employee saving funds. In fact, to obtain the CIES label, asset management companies have to devote internal resources to SRI. The first SRI analysis department was created in 2002 (see Arjaliès, 2010).

A second set of laws contributed to the development of the French SRI market by promoting more transparency and information to investors, by focusing on corporate responsibility reporting. The Nouvelles Régulations Economiques (New Economic Regulations or NRE) law of July 2001 (Article 116) obliges all companies listed on the first market (the largest market capitalizations) to report on a yearly basis on the social and environmental impacts of their activities. There are four sections to the Paris Stock Exchange: The first market (generally referred to as the official list) is composed of the largest publicly traded companies; the second market is made up of medium-sized companies; the new market covers new companies that are quickly expanding and need to access capital to fund this expansion; and other securities come under the free market.

In 2011, the Grenelle II law extended the reporting obligation to two types of actors. (The Grenelle I law followed the “Grenelle environnement”—a conference held in 2007 bringing together the government, local authorities, trade unions, business, and voluntary sectors to draw up a plan of action of concrete measures to tackle the environmental issue.) Article 225 expands the perimeter of corporations concerned by mandated disclosure not only to listed companies but also to other nonlisted large French companies with over 500 employees and French subsidiaries of foreign companies. It also expands the range of information required, and requests external verification. Moreover, Article 224 expands disclosure requirements to asset managers and open-ended collective investment companies (Organismes de placement collectif en valeurs mobilières or OPCVM) as well. In fact, asset management companies now have to disclose whether an SRI policy is in place, by reporting to which extent social, environmental, or ethical considerations are taken into account in the selection, retention, and realization of investment.

As a consequence, since the early 2000s, the diffusion of SRI into French mainstream asset management is gaining momentum, thanks to significant legislative changes.

SRI Mainstreaming in France: Results From a Field Survey on French SRI Analysts

To document the debate on the issue of SRI mainstreaming in France, we conducted a “field survey” which was sent to French asset management companies, with the support of the French Asset Management Association (AFG) and the Chair for Sustainable Finance and Responsible Investment (Finance Durable et Investissement responsible or FDIR). The Chair FDIR was created in 2007 by French asset management companies and institutional investors engaged in the areas of responsible investment and sustainable finance to contribute to the emergence of new valuation models that take into account the long-term environmental and social consequences of firm behavior (see http://www.idei.fr/fdir/en/).

The questionnaire was discussed with many people involved in the matter, and formally tested on two key actors of the field (one of the biggest asset management actors and a specialized actor) at the end of 2008. This testing led to some fine-tuning and improvements of the questions.

The responses to the questionnaire were collected between December 2008 and March 2009. Fourteen questionnaires were received, 12 from asset management companies (Dexia AM, Natixis AM, Macif Gestion, Ecofi, Banque Postale AM, Credit Agricole Asset Management [CAAM], Groupama, Federis AM, La Financière Responsable [LFR], Alcyone Finance, Financière de Champlain, and Oddo Securities) and 2 from institutional investors (FRR, Fonds de Réserve des Retraites, one of the major pension funds in France, and CDC, Caisse des Dépôts et Consignations, one of the largest public banks and a key asset management arm for the French Government). The responses have been treated with strict anonymity and confidentiality.

The number of questionnaires received represent 25% of the number of asset management establishments on the French market (from the Novethic, 2009a, study), a relatively low proportion which may reasonably raise a significant validity issue. In our view, the pros and cons of this survey procedure are as follows. Clearly, such a survey only illustrates some trends on the French SRI market, but we do consider that the results allow characterizing some important trends for several reasons.

First, the responses come from organizations with assets managed representing roughly €17 billion, that is 77% of the relevant market in terms of collective asset management. Hence, the number of responses may seem low as a simple count, but the representativeness of the respondents appears much larger. Moreover, the diversity of the establishments interviewed allows the coverage of a majority of SRI profiles. In fact, both sell-side SRI analysts (working for a brokerage or firm that manages individual accounts and makes recommendations to the clients of the firm) and buy-side SRI analysts (usually working for a pension fund or mutual fund company) are represented in the sample. Moreover, the European leaders (which are large influential actors) operating on the French market are also represented in our sample.

In sum, though the sample is relatively small (25% of the number of French asset management companies) and therefore not strictly representative of what a large sample would show, we do believe that it is representative enough of the French market (77% of the market in terms of collective asset management).

Finally, from a statistical standpoint, if the validity issue is important, unfortunately there is no objective way to determine the sample size needed. Textbooks offer no simple formula for determining the minimum sample size, in part because the true underlying distributions are virtually never known in advance. Besides, given that the validity of our results is related somehow to the sample size, it is important to note that the adequacy of the sample for hypothesis testing is also related to the sample variability. Low variability (as measured by, for example, the standard deviation of the distribution estimated from the sample) means that a relatively small sample is more likely to be sufficient than when the variability is high.

The questionnaire contains 20 questions decomposed into three subthemes: composition of the SRI team, nature of activities of the SRI team, and diffusion and use of the SRI teamwork.

These three subthemes allow examining whether a SRI mainstreaming is taking place as follows.

The profile of the SRI team

Mainstreaming may imply a growth trend in terms of size, together with team members possessing some seniority.

The nature of activities of the SRI team

Mainstreaming could rely on the emergence of some SRI leaders (as this is the case for mainstream analysts), as well as important time spent on information gathering (professionalization of the domains) and wide diffusion of ESG factors in the future.

The diffusion and use of the SRI teamwork

Mainstreaming would clearly imply a growing use and diffusion of SRI work by other (conventional) analysts and asset managers.

We report the main results of this survey in light of the mainstreaming issue by focusing on two dimensions: the conviction of SRI analysts and the diffusion and use of SRI teams’ outputs. The detailed questionnaire and the overall set of results are available from us on request.

The conviction of SRI analysts: Mainstreaming is clearly taking place

The first striking result of our study on the convergence between SRI processes and conventional asset management relates to the analysts’ opinion on the future of SRI and on its main advantages.

More than 60% of the respondents consider that SRI is likely to dissolve itself into conventional asset management (cf. Figure 2). A few analysts though consider that both phenomena will coexist (i.e., dissolution of SRI into conventional asset management together with niche market).

Figure 2.

The future of SRI.

The path to mainstreaming can be easily understood when we observe that for most respondents, the major value added by SRI works is related to a better risk management (cf. Figure 3). This reflects a classical key factor of financial performance management: Any information allowing risk reduction in portfolio selection does contribute to increase value.

Figure 3.

The main advantage of the SRI approach.

Given that for most SRI analysts surveyed mainstreaming is taking place, one may naturally wonder whether this belief is reflected in the profile, the nature of activities, and the use of the SRI teamwork.

From this retrospect, we do observe a professionalization of SRI teams, but mainstreaming tends to occur only at the margin.

A first dimension of mainstreaming may be reflected in the professionalization of SRI teams. In fact, in the early 2000s, the French SRI market was characterized by institutional SRI demand by the creation of public pension funds which made SRI conspicuous leading SRI actors to build mobilizing structures to meet this demand (Arjaliès, 2010). In light of this phenomenon, the organizational positioning of the SRI teams reveals that in more than 60% of the responses, it is outside conventional financial analysis (cf. Figure 4).

Figure 4.

Functional organization.

This result may be explained by the fact that a number of institutions represented in our sample do not have buy-side analysts. However, in light of a potential convergence toward the mainstream asset management, such a proportion interestingly suggests that in this phase of constitution of the domain, things essentially occur at the margin. An alternative could have been the more systematic building of SRI skills and teams within the existing traditional financial analysts’ units.

The diffusion and use of SRI teams’ outputs: A clear sign of mainstreaming

One of the most important dimensions in which mainstreaming in SRI processes may be observed is reflected in the use of SRI teams’ works. Over a 6-year period, the exclusive use of these analyses by “niche market” SRI funds switches from a norm—67% 3 years ago—to a marginal case—13% in 3 years from now (cf. Figure 5). Moreover, for almost half of the respondents, these works will be used predominantly for conventional funds management. If there is a convergence between mainstream asset management and SRI asset management, it clearly appears here: Corporate social and environmental performance is declared to be growingly incorporated into conventional asset management and the materiality of environmental, social, and governance factors therefore diffuses.

Figure 5.

Diffusion of SRI analyses to conventional funds.

This trend is confirmed by the fact that traditional asset managers tend to take into account SRI analyses in their investment decisions: The general tendency is toward a systematic integration with vanishing marginal integration, from 47% to 7% in 6 years (Figure 6).

Figure 6.

SRI and the asset management sector.

Similarly, the use of other SRI analyses is going to develop but not intensively: A marginal integration will evolve from 33% at the time of survey to 13% in 3 years, and systematic integration of other analysts’ works will rise from 13% to 20%.

Conclusion

The diffusion of SRI criteria into conventional asset management is complex but could confer a crucial scope for finance to promote socially and environmentally desirable activities. Recent research focused on the behavior of financial analysts has highlighted their difficulty to go beyond traditional financial approaches and use nonfinancial, in particular environmental and social, information in their diagnoses (Saghroun & Eglem, 2008).

The objective of this research note was to document the French SRI market and examine this issue of mainstreaming within this national context. The study shows that the convergence toward the mainstream financial analysts and asset management seems to be engaged in France. The themes worked on are becoming more and more important for the asset management sector in general. SRI experts are more and more frequently consulted. Their recommendations have a growing impact on the decision-making processes of traditional actors of the financial community.

However, as the French SRI field is still emerging and growing at a fast pace, the diversity of practices remains significant. This wide heterogeneity of practices and positioning in the respective organizations can be interpreted as a clear sign of a transition phase. But if one had to predict the next phase, betting on a continuing mainstreaming would probably not be a bad option.

The limitation of our illustrative survey is that the sample of responses is relatively small (25% of the number of French asset management companies). However, we believe that it may still be considered as representative of the French market given that the responses come from organizations representing 77% of that market in terms of collective asset management, with lower variability than what a bigger sample would show. We appreciate that this view may be disputed but consider that their view is meritorious.

Footnotes

Acknowledgements

The authors would like to thank the editor Duane Windsor and anonymous referees for helpful remarks on a previous draft of this article.

The article was accepted during the editorship of Duane Windsor.

Authors’ Note

An earlier version of information in this research note appeared in a research report form as “SRI Analysis and Asset Management: Independent or Convergent? A Field Study on the French Market” (DR 10006) by P. Crifo and N. Mottis (April 2010). Cergy, France: ESSEC Business School Paris–Singapore. Retrieved from .

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: Financial support from the Chair for Sustainable Finance and Responsible Investment (Chair FDIR) is gratefully acknowledged by P. Crifo.

Author Biographies

Patricia Crifo (PhD, University of Lyon) is a professor of economics at University Paris West and Ecole Polytechnique. Her research interests focus on corporate social responsibility and sustainable growth. Her articles have appeared in such journals as Annals of Economics and Statistics, Economic Modelling, Gérer et Comprendre [Understanding and Managing], International Journal of Manpower, Labour Economics, Macroeconomic Dynamics, and Revue Francaise d’Economie [French Economic Review].

Nicolas Mottis (PhD, Ecole Polytechnique) is a professor at the Department of Accounting and Management Control, ESSEC Business School. His research interests focus on strategic control and corporate social responsibility. His articles have appeared in such journals as Comptabilité Contrôle Audit [Accounting, Controlling, Audit], European Business Forum, Gérer et Comprendre [Understanding and Managing], Revue Economique [Economic Review], and Revue Francaise de Gestion [French Management Review].

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