Understand ethical & solidarity finance to pivot towards responsible investment

Reconciling financial performance with social and environmental utility – this is what ethical & solidarity finance offers. But what does this really mean and how does one choose to invest in responsible finance? The EDHEC Alumni Finance club organised a conference on Monday 29 November 2021 to address these questions, with three guest speakers: Astrid Hannecart (EDHEC 2017), wealth management consultant and ambassador of the EDHEC Alumni Finance club, Gianfranco Gianfrate, finance professor at EDHEC Business School, and Jean-Louis Kiehl, chair of the French Federation of regional chambers for social overindebtedness (CRESUS).

How to recognise responsible finance 

Whereas traditional finance seeks the best possible economic profitability, responsible finance places great importance on extra-financial indicators by taking into consideration environmental, social and governance (ESG) criteria. This means it is a financial approach designed to have a positive impact on the environment and society. Astrid says that before investing, “it’s important to look at labels like SRI or Greenfin.”

SRI stands for Socially Responsible Investing, based on the principle of investing in firms that contribute to sustainable development, thereby combining economic performance with social and environmental utility. Astrid points out that an increasing number of funds are SRI certified: 500 in 2020, compared to more than 800 in 2021.

First launched in 2015 at COP 21, the Greenfin label is much more selective and guarantees the “green” quality of investment funds. For example, it excludes companies from the nuclear or fossil fuel sectors and favours those working towards an energy and environmental transition or combating global warming. 

These criteria and labels make it possible to be well-informed before deciding to invest in a fund.

Opt for solidarity-based investments 

5 types of solidarity funds 

1. Shared return funds: your savings are invested in the stock market and part of the revenue and/or management fees are paid to a foundation or charity. Example: Meeschaert.
2. 90/10 funds: 90% of the fund is invested in the stock market (and you can choose responsible investing criteria), with the remaining 10% invested in organizations from the social & solidarity economy. Example Mirova.
3. Mutual real estate: real estate is the second-biggest emitter of CO₂ in France! But you can invest in this sector in a way that takes ethical criteria into account (such as the environmental qualities of buildings). And part of the rent and/or management fees are paid to a foundation or charity. Example: Roche Dubar. 
4. Shares in solidarity-based organizations: this simply involves taking a share in the capital of a company that meets social and environmental criteria. Example: Familles Solidaires.
5. Solidarity-based corporate bonds: under this scheme you directly finance a solidarity-based organization by lending it money, in exchange for a fixed interest rate over a given period.  

CRESUS: an organization with a social vocation that benefits from solidarity investing 

The network of CRESUS associations, which for 30 years have been helping people facing overindebtedness, is a fine example of solidarity investing: it is financed both by private investors and companies, including J.P. Morgan and HSBC. This kind of financing has great potential, as explained by CRESUS chairman Jean-Louis Kiehl: “thanks to a hybrid financing system involving the State, local authorities and SIR funds, the association aims to promote its inclusive financial model across Europe.”

A close look at green investment: sustainable development or greenwashing? 

For Gianfranco, “this branch of finance is in its infancy and faces a long-haul battle.” But he also says Europe is quite well-positioned in this area. Millennials are showing particular interest, and although this young population segment does not yet have much available capital, they represent the future. The risks stemming from climate change are one of the major difficulties linked to green investing. Each year at the World Economic Forum in Davos, a list of the 10 biggest risks for the future of companies is drawn up: many of these dangers come from climate change (heatwaves, flooding, etc.) because an increasing number of regions around the world are at risk. However, Gianfranco explains that these risks also present opportunities because the energy and environmental transition will require huge public and private investment as we shift towards the new “low-carbon” economy. The potential for investors and finance professionals is therefore considerable, and the banking system, which is quickly evolving, is taking a close interest (in particular the European Central Bank). 

3 arguments in favour of green investing 

• Responsible investing is enjoying strong growth, with responsible criteria increasingly integrated into the decision-making process.
• 90% of professional investments worldwide take sustainability considerations into account when choosing the assets to make up their portfolios.
• Demographics are changing in favour of sustainable development and because of climate change.

3 negative aspects of green investing

• Greenwashing, i.e. steps to present a company’s activities as greener than they actually are.
• Fragmented sustainable development.
• Lack of measures to ensure companies’ promises are fulfilled.  

Identifying as “green” and the issue of evaluation 

Gianfranco points out that worldwide only 12% of assets managed by investment firms are actually green, while 90% of investors favour investments that take into account the climate and sustainable development. The problem lies, among other things, in the evaluation system, as each company produces its own reviews and most of the data is not audited. Similarly, this evaluation process is made difficult by all of the layers involved in the notion of being “green”. There are many factors to take into account: the emissions needed to produce the company’s goods or services, the energy purchased to operate (energy that can never be 100% green), the emissions generated by the supply chain and work-related travel, etc.

But although the business of green investing is imperfect and there is a long way to go, responsible finance is nonetheless a means to act. Investing in the solidarity-based economy does result in tangible benefits that are of use to society. 

Any questions about this complex area? The EDHEC Alumni community is ready to help. Don’t forget to check the calendar to find us at events and chat about a wide variety of topics!