Olivier Johanet

President of LFR

 

ESG (Environmental, Social, Governance) standards for asset management are being reviewed in Europe and the United States. La Financière Responsable (LFR) will contribute by sharing its experience.

Over ten years ago, LFR pioneered an ESG database, known as Empreinte Ecosociale®, so that it could base its investment decisions on quantified extra-financial data, monitored over time and comparable across entities, like the existing approach in the financial field with accounting documents. The ultimate goal of this highly innovative project is to check the consistency of ESG data with financial data when analyzing companies proposed for investment. This involves going beyond mere data collection and seeks to achieve a coherent basis for forming financial and non-financial opinions, thereby showing investors the usefulness of ‘responsible’ characteristics in building genuine, sustainable financial performance. LFR’s research also received significant government support, having been awarded Jeune Entreprise Innovante status, which recognizes innovative start-ups, and having qualified for a research tax credit.

To ensure the soundness of the work, we established some strict rules:

– Firstly, all the primary data we collect comes from the companies themselves. This data is therefore incontestable, and cannot be challenged by the issuers themselves;

– As a corollary, this data must be public, to avoid any confidentiality issues that would render it useless;

– The annual data collection campaign must be run in ‘partnership’ with the issuers themselves: We extract data from their annual reports ourselves and put it into a questionnaire that we submit to the company for verification (spontaneous information), asking the company to supplement this information to complete the questionnaire if necessary (assisted information). This process is an advantageous exchange with the company, allowing certain results to be properly understood, sharing specific definitions and identifying dialog points (engagement policy);

– Quantified indicators and closed questions must be used to improve the objectivity of the information, which is often subject to many interpretations and therefore comments;

– To guarantee that we are using indicators that are clearly defined and recognized, we use standards—often defined under the aegis of the United Nations—both in the environmental and social fields;

– To allow ‘horizontal’ comparisons, surveys are done for all companies held in portfolio on a given date, as well as those listed on the indices on the same date (for example, CAC 40, Euro Stoxx 50, etc.);

– Obviously, all data collected and validated must be kept in a safe but easily accessible place to allow for ‘vertical’ comparisons.

 

Armed with these rules and with tenacity, we used this database to establish the responsible characteristics advertised to our investors, which also provide justification for issuers. After ten years’ work, and at a time when the topic is in the limelight, we can (and must) share some of the things we have learned:

– Stakeholder training is undoubtedly the most important action required alongside the development of ESG standards. Many concepts from a wide range of disciplines are involved and these can only be used if they are properly understood;

– National cultural differences become very clear, and must be kept in mind to understand the limitations of the exercise;

– Data is only a prerequisite; it is fundamental but insufficient. Indeed, we cannot simply juxtapose the data; we must know how to read it. Parameters should therefore be developed to decode and derive useful meaning from the data. For example, at La Financière Responsable, the use of strategic filters, inspired by Michael Porter’s work, has given particular meaning to the data;

– The data must be readily and intelligibly accessible for portfolio analysis and monitoring, and then for clearly informing investors;

– The relationship with the issuer is key. The issuer must know and understand how the program is used in order to join. Regulatory restrictions alone will not be enough to drive the movement.

 

In conclusion, we must be aware that this is a long and often stony path, but that it must be traveled resolutely to ensure that responsible investment is taken seriously.