Socially Responsible Investment (SRI) represents a major change of direction for financial investments, moving toward increasingly sustainable, socially responsible mindsets. Fundación MAPFRE is championing a way to invest that not only seeks profitability, but also pays a great deal of attention to the use to which these funds are put.

TEXT: RAMÓN OLIVER IMAGES: LAURA MARTÍNEZ LOMBARDIA

The image of Michael Douglas in the movie Wall Street – that financial ‘shark’ with his slickedback hair, as full of arrogance as he was short on scruples, sporting flashy suspenders and starched collars – struck deep into the collective imagination. It was the end of the 1980s and the visionary film was already anticipating what, twenty years later, would end up exploding in the face of contemporary society. That quagmire of speculative financial practices where maximum returns took precedence over any other consideration. The message was clear: earn money no matter who gets hurt. An equation in which there was no room for ethical or social questions.

Nowadays, those suspenders still form part of the wardrobe of many of the current floor brokers, and the quest for dividends remains the legitimate goal of investors, but some things have indeed changed. “The image of the financial industry was severely damaged after the crisis of 2008 and the years that followed,” declares Alberto Matellán, Chief Economist at MAPFRE INVERSIÓN. On September 15, 2008 the resounding collapse of Lehman Brothers, the fourth-largest investment bank in the United States, eloquently symbolized the end of an era and that way of perceiving the financial markets.

The concept of “responsible investment” is not new at all. “Way back in the 16th century, the School of Salamanca – those who considered themselves the first economists in history – felt that investment, just like any human activity, should be bound by ethical limits,” recalls Matellán. The predominant materialistic and utilitarian philosophies of the 20th century blurred that notion, which is now making a strong comeback as a reaction to the excesses of the crisis. According to data from SpainSIF, sustainable investment now accounts for almost half of the domestic fund market. 46 percent of the collective investment institution and pension fund market, equivalent to a volume of 185 billion euros, already fall into this category. And the figures keep rising. The Global Sustainable Investment survey reckoned the increases in sustainable investment assets reached 60 percent between 2012 and 2014, and 25 percent between 2014 and 2016.

Socially Responsible Investment adds two differentiating elements to merely seeking financial returns: ESG (environmental, social and governance) and long-term sustainability

But what exactly is socially responsible investment? Mercedes Sanz, manager of the Insurance & Social Protection Area at Fundación MAPFRE, sums up this concept as “a way of investing that adds two differentiating elements to merely seeking financial returns: ESG (environmental, social and governance) and long-term sustainability.” For this expert, the importance of “SRI” lies in the fact that “it turns the investment activity into a way of improving the world beyond the mere profit motive.” To this view, Matellán adds that, from a strictly economic standpoint, sustainable investments “strive to include all possible externalities in the analysis, so as to minimize the negatives and boost the positive aspects to the full.” A goal, he goes on, which can be achieved through various strategies: “exclusion (avoid investing in companies or institutions with bad practices), “the best” (invest only in companies with best practices) or “impactful” (those that pursue a specific extrafinancial measurable objective).”

The terminology employed to refer to this type of financial operations can give rise to confusion. It is not the same to speak of “sustainable” investment – usually referring to massive investment products for both institutional clients (companies) and retail clients (mutual funds) – as “solidarity” investment, with its more philanthropic nature and which basically has more to do with funds that donate a portion of their returns.

Increasing awareness of small investors

Institutional investors account for the vast majority of these investments (93 percent, according to SpainSIF). However, the number of small investors who are also starting to look more closely at where their money is going has doubled in just two years. “Most savers are not concerned about knowing what is done with their investment when, for example, they opt for a fund or pension plan. But this is changing and people today are starting to demand explanations from their fund managers, not only wishing to know the evolution of its profitability, but also to ensure that their investments are in keeping with their principles. That’s the real concept of responsible investment,” Alberto Matellán remarks.

A lack of information is one of the greatest obstacles still separating small investors from this kind of investment. “Unfortunately, not all investment managers or financial advisers are ready to furnish that information, much less to perform the appropriate analyses,” Matellán laments. The fact is that a lack of transparency has been the norm in many of these operations over the years.

A situation which, nonetheless, is changing little by little thanks to social pressure and the increasingly evident accessibility to information provided by the new technologies. “Investors/ savers should be fully informed and well advised about the products they acquire, and it is the company selling the product which should furnish that information,” states Javier Garayoa, president of SpainSIF, a meeting platform setting the benchmark in the field of sustainable, responsible investment in Spain. This institution stresses the importance of the contract entered into with the fund management company duly reflecting this obligation to furnish detailed information.

A fad or market positioning?

Quite a few voices express skepticism regarding the combination of “investment” and “sustainable development”, as though they were incompatible concepts. Like water and oil. Among other things, they calls into question its profitability – a fundamental principle underlying any investment. The experts disagree. “A priori, we might think that sustainable investment entails greater analysis cost, or even foregoing certain opportunities. But, in practice, it has been shown that this investment process results in the selection of companies with a greater chance of survival over time, less exposed to risk and to scandals, and more popular with their clients,” Alberto Matellán argues. Javier Garayoa fully agrees with this analysis. “Investing with responsibility means taking fewer risks, given that an extrafinancial analysis is added to the conventional analysis, enabling long-term opportunities to be taken advantage of,” he summarizes.

Another concern people express regarding SRI is related to the underlying motives. To what extent is it genuine, reasoned market positioning or simply the latest trend? Produced by JP Morgan, the ESG Investing Goes Mainstream report points out that SRI is becoming the prevailing trend because investors “wish to minimize reputational and operational risk, without sacrificing returns.” For Matellán, there is a clear conflict between the need to ride an unstoppable wave and the resources to do so well. “Ordinary citizens are convinced that a highly important part of the paraphernalia surrounding responsible investment is simply a marketing image, with very little reality behind it. And they are not far wrong. But the fact that this component exists is no impediment to acknowledging that, if things are done well, there exist serious responsible investments with a really positive impact.”

Mercedes Sanz believes it is important for society at large to know and understand what they are and what SRI represents from a social standpoint. “Citizens must be able to differentiate between companies and investments that are socially responsible and those that are not. Sustainable investment interests them and affects all those people who wish to support projects hoping to transform society, from a major investor to someone who only has a small savings account at a bank or has taken out a pension plan. For this reason, Fundación MAPFRE is producing informative content that can be found in our Insurance and Pensions For All Project.

ESG Factors

Environmental: climate change, energy consumption, waste management and treatment, emissions, etc.

Social: human rights, child labor, health and safety, poverty, disability, inequality…

BGood governance: management quality, independence, transparency, conflicts of interest, remuneration, relations with shareholders and stakeholders, and employee relations.

The experience of MAPFRE

“MAPFRE is fast becoming one of the leading responsible investment players in Europe. We have signed the United Nations Principles for Responsible Investment and have participated in many other forums and associations related to this area. But more importantly, the major differentiating factor is that we are doing so from the bottom up: we are converting our whole investment process – from the definition of asset classes, through the analysis and construction of portfolios, right up to the products we offer – so that those impacts on the rest of society are always borne in mind.”

Alberto Matellán
Chief Economist at MAPFRE Inversión