Are French better Stock Pickers ? A review of French SRI

Are the French worse at SRI, or are they better, and perhaps a bit more practical about measuring performance?

Many socially responsible funds advertise SRI as a way to increase returns on investment (ROI).  Even the United Nations, under the UN Principles for Responsible Investment have said that:

“There is a growing view among investment professionals that environmental, social and corporate governance (ESG) issues can positively affect investment portfolio performance.”

Several American studies we have read seem to establish that SRI funds perform better than conventional indices, albeit ever slightly.   The most popular index, the KLD Social 400, is an index launched in 1990 to invest in U.S. based SRI type companies using both Negative and Positive Screening.  This index indeed has had a good long-term outperformance.  However, after reviewing several studies, we believe performance results are still not clear-cut.  Why?…well, we’ll just touch on a few…

  1. Survivor basis:  Share price histories of  corporations that are bankrupt may not have been used in studies.  This upwardly skews performance.
  2. The “Chicken & Egg” effect:  It is not clear that companies with high ESG are that way because they can afford to do good, or that they did good first.
  3. Availability bias:  The majority of studies are conducted by students, and asset managers.  It is doubtful that they would publish studies that show weak SRI performance, as most authors are trying to “make a case” for SRI.
  4. There are few standardized definitions of ESG; studies tend to look at different factors.  For example, some studies focus on the outperformance of companies in the Fortune 100 Best Companies to Work for list.  However, many SRI analysts do not consider such companies as necessarily highly ranked in ESG. 

Could performance perceptions be cultural?
Further, there is a positive bias among those researchers (many of them American) that are conducting the studies.  However, such bias may be cultural.  According to a Novethic study entitled ESG Perceptions and Integration Practices, French do not believe that ESG will increase fund returns.  In fact none (0% of those surveyed) believed that SRI would improve performance.  The most popular survey answer, at 59%, was “Contributing to bringing about a more sustainable business model” with 30% looking to “Manage long-term risks.”  In other words, French utilize SRI because it’s the right thing to do, not because they expect to receive handsome rewards.  For comparison, a large 57% of surveyed asset managers in the United Kingdom believed SRI could improve performance.  (We are using the UK as a substitute for the United States, which was not included in the survey.)

Does French performance data support their beliefs?
We have reviewed three (related) French SRI studies on investment performance.  All three studies were conducted by the EDHEC-Risk Institute.  École des Hautes Études Commerciales du Nord (the long name) is one of the top business schools in France (est. 1906).  Our favored study is the report entitled French Corporate Social Responsibility: Which Dimension Pays more? (Published June 2010).

Its results stated that “At the aggregate level, i.e, when all events are considered simultaneously, it appears that CSR has a positive (0.05%) but not statistically significant impact on a company’s stock returns.”

The short answer to the headline question above, is that Yes, French performance data do support their belief that SRI does not increase performance.

But lifting the rock reveals some interesting findings…
So why do we like this study you ask?  Well, it gives us hope.  The purpose of this study was to separate the dimensions (factors) of CSR to examine which particular ones were relevant.  In other words, what would the results look like if we isolated the “C” for example, from CSR.  The study actually examines 6 different dimensions, and four of them yielded an average positive cumulative abnormal return that was statistically significant.

The best were Environment (the “E” in ESG) and what the report called Insertion, which is helping young and handicapped people in their careers (in other words, the “S” in ESG). Suburbs also performed well, which is related to helping local communities, and is also the “S” from ESG.  We note this correlates with the outperformance of SRI investments using the Fortune 100 Best Companies to Work for list, which is more related to the “S” than the other dimensions examined in the French study.  (Note: As a reminder, SRI refers to the act of investing in companies that utilize CSR/Corporate Social Responsibility and ESG/Environmental Social Governance.  SRI is from the investors’ perspective, while the other two are from the corporation’s view.)

Cumulative Abnormal Returns Comparisons (click to enlarge)
Source: EDHEC, June 2010

Two additional French studies
The other two studies (one is an update) were based on the original EDHEC paper written in 2008.  The first study used the Fama-French three-factor model for a six-year period ending in 2007.  The latest study’s (September 2010) goal was to update the latter study to examine the effects of the Financial Crises on socially responsible investments.  This study examined 62 funds over a fairly long period for SRI (8 years).  The sample was split into two types of funds: Traditional SRI, which is mostly best-in-class funds and a Green group of funds.  Note that Negative funds that screen out for sin-stocks are not as popular in Europe as in the States, and thus, were not examined.  The Green group included funds that are related to the environment such as renewable energy, water preservation or climate change.

Did the Financial Crises affect Socially Responsible Investments?
The results of the September 2010 update (The Performance of SRI and Sustainable Development in France: An Update after the Financial Crises) were not what investors were hoping for.  None (zero) of the 62 funds of the sample produced both positive and statistically significant alpha.  In other words, after adjusting for risk and the security market line, SRI funds did not outperform conventional indices.   The study appears very comprehensive as it not only looks at the conventional Fama-French factors (which are similar to Beta) but also examines and compares the VaR (Volatility at Risk) for the funds.  It notes that SRI indices exhibit both higher standard deviation (volatility) and VaR than conventional indices.

Side-note on the studies’ use of Green Funds.  Firstly, Green Funds should be examined with a long time period (perhaps 20 years if possible) since their look-back periods may be too short as these funds may be leveraged to energy prices and solar subsidies and such are cyclical in nature.  Secondly, we note that certain investments in Green Funds may not be considered socially responsible by SRI aficionados.

The study highlighted Green Funds, of which had better returns than traditional SRI funds with a slightly higher risk.  However, this is not what we have experienced in the United States.  Ethanol and Solar companies, for example, have had extremely volatile stock prices over the last 5 years, though we cannot provide our readers specific alphas at this time.

Lastly, the study analyzed the effects of the U.S. led Financial Crises onto SRI funds.  The general conclusion was that SRI funds were not spared the increase of extreme risks during the crises.

Our Conclusion:  It appears that the French are no better and no worse at socially responsible investing compared to the Americans.  However, the French culture, which includes their historically more intense reliance on statistics, produces a more realistic conclusion.  We are yet to be convinced that SRI improves investment performance given all the extra work and analysis involved (and higher volatilities).  This “extra work” results in higher management fees to investors (i.e., lower net returns). Future studies will no doubt answer this question one day…

French SRI: European and French CSR Regulations

Part II

European (and French) CSR regulation:
The French have been particularly interested in following the United Nations Principles for Responsible Investment (UNPRI)  Since it was released five years ago, the number of signatories have increased to 800, representing 48 countries managing total assets of $25 trillion.


During the fall of 2001, amidst the aftermath of September 11, the European Commission (“EC”) shed a more peaceful light with its publishing of a green paper, entitled Promoting a European Framework for CSR (“Corporate Social Responsibility”).  The paper’s purpose was to act as a launchpad for CSR debate throughout the member states. 

The EC also published a paper entitled “Implementing the Partnership for Growth and Jobs: Making Europe a pole of excellence on CSR” in March 2006.  The significance of this paper was to unify European member states’ CSR initiatives.  The report also noted that while CSR was not a substitute for public policy, there were several benefits including:

    • more rational use of natural resources (e.g., environmental aspect of ESG)
    • innovation
    • poverty reduction (e.g, social aspect of ESG)
    • and greater respect for human rights (e.g. social aspect of ESG)

Drilling down within the EU, there have now been eight countries that have specific national SRI regulations that cover their pension systems.  The UK wrote regulation in 1999, and enacted them on July 2000.  This regulation called for asset managers to release information on their SRI initiatives.  This regulation was enacted by both the desire to enhance consumer protection and to clarify the legality of SRI-oriented pension investment policies.  (Note, the US still needs to clarify the Prudent Man Rule of ERISA regarding how SRI fits into pension management.)  Note that this regulation deals with pensions and not the actual CSR initiatives of companies.   According to Belsif (Belgium Sustainable and Socially Responsible Investment Forum) both the transparency effect and the enforcement of the above regulation has been “rather weak.”

The French were inspired by the United Kingdom’s pension fund regulation.  In 2001, the French passed a law requiring that employee savings plans specify their rules for ESG.   A similar law closely followed that same year.  This law requires the Retirement Reserve Fund (which supports the French pension system) disclose how its investment policy guidelines take into account ESG.

In May 2001, French firms became required to report on ESG issues, initiatives, etc. in their annual reports.  Required firms are those that are publicly traded or regulated.  Please refer to Belsif’s website and this link for the actual rule.French legislation.

On July 24, 2009 several French signatories agreed to the “Principles for Socially Responsible Investing”PDF file.  This document included several guidelines for Paris financial market participants and continued the work done by Paris Europlace and Forum on Increasing the Contribution of Finance to Sustainable Development, which was co-chaired by French President Nicolas Sarkozy.

The report gave the following recommendations:

  1. facilitate the inclusion of ESG criteria in investors’ decision-making processes
  2. clarify and increase discussions with companies so that they’re encouraged to release qualitative (nonfinancial) information to the public
  3. and develop accounting standards complementary with the above.

As the reader can easily determine, ESG/SRI rules and regulations are fairly “light-weight” and inconsistent within Europe and between Europe and the United States.  This website will keep readers updated with any significant new developments.

Sources:  Belsfi, Novethic, Social Investment Forum, Eurosif, Paris Europlace

French SRI: Vive la France !

Part I

EVERY DAY ONE HEARS THE UNENDING MARCH OF THE CHINESE ECONOMY.  China is large, powerful and growing quickly.

However, it will be a long time coming before it leads in Socially Responsible Investing.  For now, the baton remains in Europe, particularly Northern Europe, which controls the largest amounts of SRI assets.  However, when it comes to the spirit & soul of SRI, the French are second-to-none.

France is the world’s 4th largest economy, and its influence is even larger; as it has the second largest number of diplomatic missions in the world.  Its Revolution inspired motto is: Liberté, Égalité, Fraternité.  In plain English, the “jist” of this motto is having one’s citizen’s treated fairly, with freedoms as we have in the States, and that one looks out for the common good.  Ah, could this be the roots of modern SRI?

France is the 14th ranked on the Human_Development_Index.  Countries in this index tend to also have the most advanced SRI initiatives.  The Netherlands is ranked even higher (number 7).  It also happens to manage one of the highest levels of SRI assets in Europe, at EUR 130 billion.

Size & Growth of French SRI:
French involvement in Socially Responsible Investing is large, at EUR 50.7bn, and growing quickly. SRI assets grew 70% in 2009 (latest available data) on top of 37% growth in 2008.  The 2008 growth, while smaller is spectacular considering it occurred in the midst of the global Financial Crises.   This data is sourced from (which is part of the French pension system).  While 2010 data is yet to be published, we expect another double-digit growth number given recent trends.

Source: Novethic SRI Research Center

By Asset Type:
Drilling down, the largest growth came from Mutual Funds, which Novethic labels Collective Management.  Within Mutual Funds, the largest growth area was to Retail investors.  Employee Savings was also a very large contributor.  This includes 401K type plans.  Note that while the Retail Investor grew rapidly, Institutional Investors still dominate the French SRI market (69% vs 31% for retail investors).

Employee Savings examined:
SRI employee savings benefited from the conversion of bond and money market funds, with those assets nearly doubling.  The proportion, or share, of employee savings funds in SRI rose from 8% to 13%.  As US readers probably already noticed, few United States savings plans offer such options.

Given that capital markets were so strong in 2009, one wonders whether the sharp growth was due to strong markets.  Well, Novethic has broken this down too!  According to their study, most of the growth came from fund conversions, inflows, and lastly (least significant) being performance & gains from the stock and bond markets.

Source: Novethic

Drilling down again..within these two, the growth in Retail investors was attributed to the growing awareness of SRI in the retail banking network.  Secondly, the growth was attributed to popularity in employee savings plans.

Breakdown of Investments:
A big surprise was the huge amount of money invested in non-equities.  SRI is typically thought of as stocks/equities in the United States.  However, given the nature of European investing (and the older demographic profile) it makes sense that most monies are invested in non-equities.  These include Bonds and Money Market accounts.  There were several money-market accounts that converted into SRI type funds.

Source: Novethic

Investing Approach:
ESG Screening, or what’s called Positive Screening on this website, was the most popular approach in French SRI.  I consider this true socially responsible investing.  So readers, please take note…Though Negative Screening was also utilized by several asset managers.  This is far less popular in the States where asset managers are drawn towards ESG Screening/positive screening and Engagement/Shareholder Activism.  In the US, shareholder activism amounted to $1.5 trillion, or about 50% of the total monies invested in SRI ($3.1 trillion). The Shareholder Activism style seems to fit well with the US’s “cowboy” culture.

French SRI versus U.S.
There are some key differences between how US asset managers invest in socially responsible companies, and those of our friends across the pond.

  • the French are ardent believers of Positive Investing
  • we, on the other hand, are focused on Shareholder Activism (see above) 
  • the French aren’t really convinced that SRI will bring extra-positive (“high Alpha”) returns to their portfolios, but are convinced it’s the right thing to do.
  • on the other hand, Americans usually tout that such investing brings higher returns.  In fact, there are now Hedge Funds –> link that employ quantitative  SRI techniques to earn extra-returns on their investments.  Some HF/asset managers don’t even care about it being the ethical thing to do, so long that returns are good.
  • the French have huge amounts of Euros behind the SRI strategy
  • in America, SRI, while in the trillions of $$, hasn’t yet reached mainstream, though it’s catching on quickly.
  • French SRI, while grass-roots oriented, has also been motivated by the UN Principles for Responsible Investment, as well as the French government.
  • American SRI is, of course, “laissez faire” – the American-way; and free from state/government intervention.
  • the French aren’t too keen on “green investing
  • the opposite’s true on the streets of America, where people sometimes think that “green investing” is SRI.  In fact, green investing has grown rapidly as its easily understood and can be marketed via exchange-traded (ETFs) and sector funds.  (We will be publishing a piece/list on all of the ETFs available to both US and overseas investors.)

    Then, where are the similarities?
    Surprisingly, despite cultural differences, and several shades of gray in the definition of SRI, the United States and France have similar definitions of SRI.  Please review our SRI trends articles for background information.  Overall, we both strive to invest in companies that are doing good, either for their employees or their larger communities.  We also agree on the various categories of SRI (e.g., Best in Class/Positive Screening) though each country tends to favor one category over another.

    French SRI versus European ESG:
    Thanks to Eurosif (in partnership with Novethic) 251 European investors were surveyed for the first time on their use of Environmental, Social and Governance (ESG) criteria into asset management.  Eurosif (the European Sustainable Investment Forum) is a think tank whose mission is to develop Sustainability through European financial markets.  Note that we are using SRI and ESG interchangeably, though ESG in this context/survey is a tad more broader, and less strict (the methodology is used more on a case-by-case basis than SRI which is more regimented).

    Eurosif’s survey spanned nine countries during 2010 (totaling EUR 7.5trillion), with the largest being Denmark with huge SRI related assets of EUR 144bn.  For comparison, the US market totals about $3.1 trillion (or about EUR 2.3 trillion).  See our Update on SRI for additional information. Based on Eurosif’s survey, below are the key differences (and similarities):

    • Both France and pan Europe overall have a strong understanding and definitions of what it means to invest for ESG.  More than 90% of the asset owners surveyed believe that Positive/Best in Class Screening is SRI.
    • France (along with Belgium) was the only country that didn’t associate ESG with investing in green companies/”clean tech.”
    Source: ESG Perceptions and Integration Practices, Eurosif, Novethic
    •  About 84% of asset owners believe that there is no contradiction between integration of ESG criteria and their fiduciary responsibility.  France, like most European countries has changed considerably in this area versus 5 years earlier, due to the release of the United Nations Principles for Responsible Investmentwebsite and due to government regulations.
      • For comparison, in the US, we are still trying to figure out if SRI fits under ERISA’s Prudent Man Rule
      • I am not aware of any case law regarding SRI and (complimenting) the Prudent Man Rule.
          • Click here for an interesting article on Fiduciary duties to pension funds and SRI.
    • Most European asset owners surveyed believed that integrating ESG into their management contributes to long-term performance.  The French don’t believe this, or invest for improved performance.
    Source: ESG Perceptions, Eurosif, Novethic
    • The French way of SRI was, as said earlier, investing in ESG positive screening, rather than Shareholder Engagement, which was more popular among Northern European investors.
    •  In terms of total Euros going to SRI, France was about in the middle of the pack compared to the other countries, led by Denmark.  The Northern European countries dominated SRI assets, while southern countries such as Italy had smaller amounts of assets (EUR 13Bn)

      Sources:  Belsfi, Novethic, Social Investment Forum, Eurosif, Paris Europlace

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