In his recent work Investir Pour nos Valeurs ? (literally: Investing in Our Values?), Mickaël Berrebi (E13) sets out what he calls the five flaws of responsible finance and offers solutions to enable savers to invest genuinely in accordance with their values. He explains. 

ESSEC Alumni: How did you become interested in responsible finance? 

Mickaël Berrebi: My professional work includes advising companies and institutional investors on investments, and for several years, responsible finance has been a major concern for the majority of my contacts. However, the industry still often remains extremely vague, hence my decision to write a book offering an overall perspective combined with avenues for thought for the future.

EA: What did you conclude in your book? 

M. Berrebi: In just a few short years, responsible finance has become a global phenomenon. It is now standard practice to suggest that investors seeking to invest combine their financial considerations with environmental, social and good governance criteria – the famous ESG triptych. Whilst this is obviously a commendable approach, the concept of ‘responsible values’ remains subjective and varies from one fund to the next. This can result in a mismatch between the promises made and what is actually expected or understood by the investor, for example in terms of impact on the climate or biodiversity.

EA: What are the different ways of defining responsible finance? 

M. Berrebi: Financial bodies more or less agree that responsible investment is considered to be investment that takes non-financial criteria into account. How this is actually implemented is where the vagueness comes in. Take the example of the methodologies used: some exclude entire business sectors such as armaments or coal, whilst others permit all areas. Which is the most valid approach? It all depends on the investors’ level of experience.

EA: How would you define responsible finance?

M. Berrebi: In my view, the current definition is more or less right. However, we should not be talking about a single form of responsible finance, but rather multiple forms. Every investor is different, so presenting a one-size-fits-all perspective for this would be unrealistic. Instead, our binary perspective of ‘responsible / not responsible’ should be traded for a more granular approach that can be split into multiple cornerstones. I would like to see a system where investors can use a ‘non-financial ID card’ to select the funds that most closely match the key values they wish to uphold. Ultimately, communication and non-financial clarity are key here!

EA: In your view, is the current vagueness the result of ongoing theoretical and legal considerations – or of attempts by unscrupulous individuals to manipulate the markets?

M. Berrebi: A bit of both, and more. The difficulty also comes the fact that environmental or societal convictions are often based on different political perspectives. For example, can nuclear power and gas be considered green energy? This question is particularly key in European countries and the USA, which are engaged in a veritable regulatory race to impose their standards with the challenges this entails in terms of capturing capital flows, all of which significantly complicates the debate regarding responsible finance.

EA: How do we establish a clear, universal definition?

M. Berrebi: There are two conditions to fulfil as a minimum. The first would be to develop and adopt shared, international non-financial standards. The second would be to accept the concept of plural responsible finance, as previously stated.

EA: What does non-financial data now include? 

M. Berrebi: On the environmental side, this could be indicators such as carbon footprint, water management or waste handling; on the social side, the number of occupational accidents or absenteeism rates. These different pieces of information then enable responsible funds to calculate a non-financial rating that makes a company eligible or ineligible for their portfolio, depending on the method applied. For example, the best-in-universe method excludes all companies that achieve a score below a certain threshold; if no company from a single business sector achieves a sufficiently high score, the fund will not be able to include any assets from this sector. The best-in-class method, on the other hand, includes the companies with the best scores compared with their sector peers; in this case, all sectors are included within the fund, including the oil and gas industries etc. 

EA: How can we help investors find their way? 

M. Berrebi: Numerous labels have been launched across Europe to help with this. However, this is not necessarily all that is required to avoid confusion – in fact quite the opposite, as there is significant disparity between the different labels. Take the two official state labels launched in France: the ISR label permits all areas of activity, whilst the Greenfin label applies an exclusion filter, prohibiting investment in the nuclear industry in particular.

EA: What role do rating agencies play in this? 

M. Berrebi: A considerable role – because whilst some of these non-financial criteria are objective, others are developed by the agencies themselves with a subjective element. So much so that there are sometimes major differences in the ratings awarded to the same company by different agencies: in 2020, the MSCI agency praised the sustainability of Tesla cars, while FTSE rated the car manufacturer as one of the worst in the sector from an environmental perspective… 

EA: Where does this subjectivity come from? 

M. Berrebi: This is a subjective area by definition, as non-financial ratings reflect environmental or social perspectives. However, these may well vary from one agency to another. This is combined with the biases incorporated by the rating methods that the agencies develop. Furthermore, even though non-financial rating agencies are more independent than traditional agencies (since they are funded by investors rather than the submitters wishing to be evaluated), their economic model makes them more financially fragile. The result: although the vast majority of non-financial rating agencies were European up until 2015, since then these have been bought up on a massive scale by English-speaking groups. Whilst the nationality of its ownership does not undermine the thoroughness and professionalism of the agency, this could eventually result in the vision of the English-speaking world becoming dominant for non-financial ratings.

EA: When all is said and done, how do you separate out the genuinely responsible managers?

M. Berrebi: It is not simply a question of some managers being less responsible than others. Once again, in my view, first there needs to be greater granularity in communicating responsible approaches so that the offering can be tailored to the investor’s actual profile, and secondly we need to emphasise greater transparency and greater clarity regarding the method applied in building the portfolio. In other words, non-financial communication standards need to be redesigned in order to avoid any confusion for clients.

EA: Above and beyond approximations, there is also some genuine wrongdoing… 

M. Berrebi: Of course – responsible finance is not immune to scandal. Just look at the number of responsible funds exposed to Orpéa stocks before the abuse scandal came to light! And another inconsistency: 70% of responsible funds across the world held Google (Alphabet) or Amazon shares in 2021. In my last two books, La Nouvelle Résistance [The New Resistance] and L'Avenir de Notre Liberté [The Future of our Freedom], I and my co-authors widely highlighted the double-speak from GAFA, who on the one hand promise a better world thanks to digital solutions, and on the other have implemented numerous controversial measures including massive exploitation of personal data, transhumanist experiments and excessive tax optimisation. However, in the face of greenwashing, it is vital to remember that the regulator also has a role and a responsibility to combat fraud and misleading communications.

EA: In your book, you even wonder whether there is such a thing as a responsible investor… What do you mean by that? 

M. Berrebi: When taking an interest in investors’ behaviour, it is always intriguing to note how irrational they can be. This is good news for responsible finance, as although literature tends to surmise that adopting a responsible investment policy does not adversely affect financial performance, there is no avoiding the fact that making this choice today will inevitably reduce the range of eligible stocks and thus force investors to hold a more structurally concentrated and thus higher-risk portfolio. In the decade from 2012 to 2021, this obstacle could be overcome by the fact that the major central banks’ expansionist monetary policy and continually falling rates created a particularly favourable environment for the securities market. However, the recent rise in interest rates and significant inflationary pressures on energy constitute the first large-scale test to see how far responsible investors are genuinely committed to their values. In my view, a responsible investor should be as exacting with their demands of financial performance as they are of non-financial performance. In this respect, the tools currently available are hugely inadequate.

Interview by Louis Armengaud Wurmser (E10), Content Manager at ESSEC Alumni 

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