SRI Mainstreaming: The Appearance of a New Institution?

SRI Mainstreaming can be defined as the progressive penetration of SRI criteria into conventional funds. The term „mainstream‟ refers to conventional funds focused on financial performance, only. In contrast, SRI funds usually aim to achieve good performances in both financial and SRI terms (even if the latter is not compulsory). To do this, SRI funds combine traditional financial analysis with non-financial analysis, known as SRI criteria. These SRI criteria relate to hundreds of environmental, social and governmental criteria such as carbon emissions, child labor or independency of boards. Until recently, the use of such criteria has enabled the differentiation between both types of funds. SRI funds have been referred to as a

„niche‟, while conventional funds have been related to the mainstream. However, over the past few years, conventional funds have also begun integrating SRI criteria. Rather than following an SRI approach, this integration has followed a financial approach: certain SRI criteria have been deemed relevant for generating financial performance. Carbon emissions criterion is a good example. This phenomenon of integration is known as SRI Mainstreaming and appeared for the first time in 2006 in the annual study of the market by Novethic (2006):

We have taken into account a new demand which seems to sustainably settle among investors: the transversal integration – case by case – of the criteria of non-financial analysis among classical financial analysis.

At the end of 2009, 90% of conventional funds were estimated to integrate at least one SRI criterion, compared to 61% at the end of 2008 and 3% at the end of 2007 (Novethic, 2010). Over the past three years, the acceleration of the SRI Mainstreaming phenomenon has been considerable; which has blurred the differences between SRI and the mainstream. On the one hand, SRI funds have attempted to restore a long-term view in asset management by

claiming that selecting the most socially responsible companies will generate better financial performance in the long-term. On the other hand, conventional funds have integrated SRI criteria to achieve better financial performance. At first sight, the difference between both may appear insignificant; which explains why a growing number of investors complain about the apparent similarities between SRI and conventional portfolios. Today, the tenants of SRI face a new challenge: to demonstrate the differences between SRI and conventional funds, while maintaining good financial performance. This task is all the more difficult since SRI performance has not yet been defined. However, SRI Mainstreaming is also a challenge for conventional actors: as SRI Mainstreaming develops, institutional investors are asking for a greater integration of SRI criteria into conventional funds. Conventional funds are also increasingly required to account for their SRI performance, and asset management urged to become more socially responsible.

Evidently, the recent financial crisis has participated in accelerating this change. For instance, in 2008, the FRR decided to gradually extend its responsible investment approach from several mandates dedicated to SRI funds to all asset classes. Along the same lines, in November 2009, Paris Europlace – the organization which promotes Paris as a financial market place – and the FIR (Forum de l’Investissement Responsable)¹² – a think-tank responsible for the promotion of SRI in France – have formed a partnership to transform Paris into a pole of excellence in terms of responsible finance and sustainable development. This change can be partly explained by commercial purposes. Notably, the Paris market place would like to compete with the London market place – well-known for Islamic finance – by becoming globally renowned for SRI. The motivations of these new investors are clear: to be responsible and to achieve better financial performance. These two goals are well illustrated by two of the five official commitments of the FRR:¹³

1. Set the performance¹⁴ bar high: thanks to its investment strategy and with the support of the Caisse des Dépôts, which is responsible for the Fund‟s administrative management, the FRR is able to take full advantage of market trends at lower cost.

12 French Social Investment Forum

13 Source : FRR www.fondsdereserve.fr

14 Emphasized in the original text.

2. Assume the responsibilityincumbent on a long-term public investor:

fiduciary responsibility towards beneficiary plans means practicing a balanced investment policy; civic responsibility towards all French citizens means conducting an investment strategy that is consistent with certain collective values in terms of social, economic and environmental development.

Regarding the potential assets of such pension funds, asset management companies have understood their interest in integrating SRI Mainstreaming into their funds.

However, this integration is a difficult task, as developing SRI Mainstreaming disrupts the practices of asset management companies. It questions the previous collective rules and beliefs of the sector: its institutions (Berger and Luckmann, 1966). Financial performance is no longer the only important factor, SRI criteria also matter. This sudden and profound change disturbs the institutional logics (Friedland and Alford, 1991; Thornton and Ocasio, 1999, 2008; Friedland, 2009) of the asset management sector: the practices, assumptions, beliefs and rules mobilized by sector members to make sense of their reality are questioned.

Facing this institutional change, asset management companies need to (re)design their collective activity: the way they used to manage their funds is no longer compatible with client demands. This transformation of practices reveals itself to be a thorny challenge both for SRI and conventional funds. Indeed, despite claiming that the most socially responsible companies will be the more profitable in the long term, even the tenants of SRI find it difficult to achieve both types of performances. Notably, this is explained by the difference of time perspective between the two performances. SRI is deemed to be more profitable in the long-term while asset management is still being assessed in the short-long-term. This challenge is particularly complex in fixed-income investment, which is technically more intricate than equity investment (Garnaud, 2009). This raises a number of problems, for this type of investment is henceforth a major business interest, especially since the financial crisis. For instance, in 2009, 72 % of invitations to tender in the French asset management sector concerned fixed-income investment, compared to only 11% in 2008 (NewsManagers, 2010).

The third article, „Explaining Practice Variation when Faced with Institutional Change: The Example of Socially Responsible Investment‟, elaborates more on the differences between both types of investment.

Regarding the complexity of such an institutional change, the dissertation aspires to understand how and why the practices of the French asset management sector have been

transformed in response to SRI Mainstreaming. Further details about the research questions under study in the dissertation are given in the following section.