Niche products with diversification benefits

KBC Asset Management’s (KBC AM) notable success in SRI funds did not happen just by chance. Geert Heuninck, KBC AM’s head of sustainable and socially responsible investment, remarks: “In 1992, KBC launched the first Belgian SRI fund on the market. The increasing success of these funds is the result of years of work put in by KBC AM to come up with an intrinsically strong product, combined with a policy of transparent communication. Incidentally, the criteria for including listed companies in KBC’s SRI funds have recently been tightened.” KBC has developed two core SRI ideologies. The first, our “best-in-class” approach, concludes that every sector in the current economy has its necessity, except for controversial sectors. KBC selects the 40 per cent best performing companies on corporate social responsibility per sector but excludes the aerospace and defence industry and all tobacco producers. Companies that meet all of these requirements are selected in the sustainable universe. CSR (corporate social responsibility)performance is measured on five criteria (equally weighted): long-term economic policy, corporate governance, environment, internal social policy and human rights. Each criterion is divided into different sub-criteria. All companies are scored on these criteria. This score is negatively affected if the company is involved in questionable practices such as allegations for human rights breaches, competition scandals, and corporate governance issues. On our website, all scores of over 2,000 assessed companies are published, allowing investors to see how these companies score on environment, corporate governance, and business ethics. The second approach is a “thematic SRI strategy”, focusing on investments in specific environmental themes as water, climate change, alternative energy and agriculture. In this strategy, we combine theme-screening with exclusion, using negative screening criteria regarding activities in controversial countries, nuclear energy, weapons. In 2000, KBC AM was among the first asset managers globally to offer SRI- screened water and alternative energy funds. These thematic funds invest in companies that are active in niche markets with a remarkable link towards sustainability. It is the product or service itself that generates additional value for the environment. More and more governments and societies are focusing on certain environmental themes. Besides being beneficial to the environment, this focus creates a very interesting investment opportunity with strong growth potential which has led to some extremely successful launches, one of the most noteworthy being the launch of our water fund in Korea two years ago which raised $1bn within three months time. Even for traditional investors, these niche products fit perfectly into a diversification strategy. Creating a sustainable investment universe is one thing. A second step is the implementation into an investment strategy. To enhance independence, KBC Asset Management has chosen to separate the SRI strategy and the management strategy. As far as actively managed funds are concerned, there is no significant difference in performance between SRI funds and their traditional peers. KBC AM is able to offer its institutional customers tailor-made SRI products. Two factors enable KBC AM to develop this unique feature. First of all, the sustainability screening process at KBC AM is a highly automated process and has the ability to include a very wide range of sustainability and ethical criteria. Thereby the screening process can easily be adapted to the client’s ethical perspectives. Secondly, new products are developed following a very cost-effective and streamlined process, as well for open funds as for structured products. The independence of the screening process is guaranteed through different policies and is a clear distinguishing factor for KBC AM. The independent External Advisory Board for Sustainability Analyses (EAB) sets up the methodology for screening the companies. Secondly, KBC AM uses the specialised databanks of EIRiS and Asset4 to screen the companies. Thirdly, the client can review the full methodology and the results of the screening on our website. At present, KBC AM manages more than 120 SRI funds with over E6.8bn in assets under management.