What purpose does SRI serve?

What purpose does SRI serve?

ESG and SRI are acronyms we see more and more without always understanding what they mean and what they encompass. ESG is Environmental, Social and Governance research. And SRI is Socially Responsible Investment.

Extra-financial data are analysed and then incorporated into investment management. But what value do these extra-financial data provide for the management of savings?

What purpose do extra-financial data serve?

Extra-financial data highlight the level of companies’ involvement in sustainable development issues and how relevant such initiatives are. A large company, such as Renault or Danone, can supply 1000 to 1200 extra-financial datapoints falling into the three pillars of extra-financial research:

  • “E”, which reflects CO2 emissions, energy policy, products’ environmental quality, and so on;
  • “S”, which includes information on the company’s labour policies, training, etc.; and
  • “G”, which verifies respect for minority shareholders’ rights, board membership, etc.

A company that fails to comply, or sufficiently comply, with good extra-financial practices risks controversy or scandal.
Boeing learned this the hard way. The uncovering of safety flaws in its aircraft also masked issues in its corporate culture. This had an enormous impact on its share price, which fell from more than 400 dollars to 100 dollars in a few months, with a loss of market capitalisation of more than 200 billion dollars. Boeing was punished hard by extra-financial analysts and managers.

In Germany, the Wirecard scandal sent the payments platform and financial services firm into bankruptcy for massive accounting fraud. And yet, warning signs had been visible 18 months previously, but Wirecard took no concrete action. Its response failed to satisfy extra-financial analysts and steered them towards potential governance issues and hence, downgrades in the company’s extra-financial rating. This ultimately shed light on mismanagement at Wirecard and sent it into bankruptcy.

In this type of crisis situation, the SRI manager can sell off a stock or reduce his exposure at an early stage when ESG criteria are not met sufficiently or not at all.

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