ÉTUDES NOVETHIC NOVEMBER 2008 WHAT ROLE FOR ENVIRONMENTAL FUNDS WITHIN SRI? Characteristics and SRI approaches of European environmental funds

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1 ÉTUDES NOVETHIC NOVEMBER 28 WHAT ROLE FOR ENVIRONMENTAL FUNDS WITHIN SRI? Characteristics and SRI approaches of European environmental funds

2 Warning : This study was produced based on a methodology developed by Novethic. The data were collected from sources accessible to investors and the general public (for example, reports issued by asset management firms and websites, as well as information provided during direct contacts with asset management companies). While these sources are considered to be reliable, Novethic cannot be held liable if any of the information provided is inaccurate or incomplete. This study is not intended as an incitement or offer to buy or sell any of the financial instruments mentioned. Novethic 28 Total or partial reproduction is prohibited without the prior written consent of Novethic. Using or citing the quantified data is allowed, provided that the source is indicated.

3 Contents OVERVIEW 4 INTRODUCTION 7 Concepts and terminology 7 Panel and methodology 8 I. Survey of funds in the global sample 9 A. History of environmental fund creation 9 B. Geographic survey 9 C. Investment regions 1 D. Size of businesses 1 E. Thematic and sector approaches 11 F. From a thematic approach to SRI 16 G. Assets under environmental fund management 18 H. Recent trends 19 II. Survey of funds in the SRI sample 2 A. Broad and Core SRI approaches 2 B. History of SRI thematic funds 21 C. Analysis of SRI sample by thematic categories 21 D. SRI practices followed 22 E. Transparency 29 Focus on distribution in France 3 Appendix 34 I: Analysis of the top 1 investments 34 II: Focus on the main countries offering environmental funds: 35 France, Germany, United Kingdom and Switzerland III: Liste of SRI funds 38 3

4 OVERVIEW What role should environmental thematic funds play within SRI? For some players, they have a natural place in the broad family of funds that integrate sustainable development criteria, which runs the gamut from traditional SRI funds that select businesses with high ratings on ESG (Environmental, Social and Governance) criteria to funds invested in green SMEs. These players advocate the concept of Sustainable and Responsible Investment as a definition for SRI, rather than Socially Responsible Investment. For others, it is out of the question to focus on greenhouse gas emissions while forgetting the respect of human rights. They wish to distinguish environmental thematic funds from traditional SRI, which uses a global and multi-criteria approach. To stimulate the debate Novethic, a specialist in the field of SRI, has reviewed nearly 2 environmental thematic funds in Europe to better understand to what extent they integrate SRI criteria and to identify the main characteristics of these green financial products. Increasing development since 26 Environmental thematic funds grew substantially in 27. In France, they have really taken off, boosted in part by the Grenelle Environmental Forum and also due to their green focus and their remarkable performances. Novethic conducted a first study in the fall of 27, stressing the relevance of the combination of the thematic approach and the requirements of SRI management. This led to the creation of a specific terminology for such products that illustrate this alliance: SRI thematic funds. In 28, environmental thematic funds were not spared from the impact of a major financial crisis. However, investing on the basis of environmental data remains relevant, and the range of products continues to diversify and expand. This is the backdrop against which Novethic surveyed an enlarged sample of 194 environmental funds in Europe. Similarly, the amount of assets invested in green industries has grown rapidly in the last two years, surpassing the 25 billion mark by year-end 27. However, the global financial crisis has had a big impact on thematic funds, which lost on average 24 of their assets between January 1, 28 and September 3, 28. This depreciation is directly related to the counter-performances of the businesses whose stock they invest in. Conversely, they did not seem to suffer massive withdrawals. Specialists estimate that environmental stocks should be among the winners when the markets bounce back. The survey shows that the concept of environmental thematic funds is not new; the first funds were created in Sweden in From then until 25, the development of environmental funds has been steady, and the number of countries where this type of fund can be found has grown. In 26, and even more so in 27, fund creations multiplied, reaching a peak of 79 new funds in 27. In 28, the pace of growth has slowed down slightly but remains brisk (35 new funds over the first 9 months of the year). Today, four countries provide the largest number of environmental thematic funds: France (4 funds), Germany (35), the United Kingdom (31) and Switzerland (28). They are followed by the Netherlands, Belgium and Ireland, each offering 9 environmental funds. Note that more than 4 of these funds are registered in Luxembourg, which facilitates international distribution. 4

5 OVERVIEW Diversified environmental themes, reflecting the major environmental issues The vast majority of European environmental funds are invested without geographic restrictions, and combine investment in small, mid and large cap businesses. This distinguishes them from nonthematic SRI funds, which are mostly invested in multinationals. This in-depth study of fund characteristics has led Novethic to classify the various thematic approaches adopted by asset managers into 7 categories: Forestry Funds - 2 of the sample Renewable Energy Funds - 9 of the sample Water Funds - 11 of the sample Environmental Sectors Funds - 14 of the sample Climate Change Funds - 2 of the sample Sustainable Development Thematic funds - 2 of the sample Multi-Approach Environmental Funds - 24 of the sample Confusing marketing The study has also shed light on diversified marketing approaches that can be grouped into 6 evocative categories: wood, blue for water, alternative energy, climate, green for global environmental issues, and sustainable for global sustainable development issues. Crossing the classification put forth by Novethic with that suggested by fund communication demonstrates that numerous asset managers broaden the actual selection of themes compared to the messages they convey. Accordingly, nearly two-thirds of the funds focused on alternative or renewable energy also allow investments in other environmental sectors, such as waste or water management or in materials that improve the energy efficiency of buildings. Similarly, more than half of all funds presented as addressing climate change issues can be assimilated into broader thematic categories (multi-approach environmental funds or thematic funds focused on sustainable development). The only fund category in which the marketing appeal is globally consistent with the companies selected is that of water funds. Innovative SRI practices In the second part of the study, Novethic s goal was to assess the degree to which traditional SRI (Socially Responsible Investment) practices are part of the management of thematic funds. The funds listed in the study were divided into three separate samples: Environmental thematic Non-SRI funds - 58 of the survey sample Environmental thematic Broad SRI funds - 13 of the survey sample Environmental thematic Core SRI funds - 29 of the survey sample Swiss funds are those that most often apply SRI approaches to their environmental funds (more than half of the funds), unlike French funds. Among the four countries that offer the most environmental thematic funds, France is the least likely to use SRI: nearly two-thirds of its environmental funds are non SRI. Within environmental thematic SRI funds, a more exhaustive assessment was conducted on the SRI approaches used by asset managers. The goal was to distinguish between funds adopting a Broad SRI approach, characterized by initiatives that more or less take SRI issues into account, and those adopting a much more structured Core SRI approach. The study highlights the real diversity of SRI approaches, which underlines the asset managers capability to innovate. 5

6 OVERVIEW Specific environmental exclusions Fund creators have come up with original selections and are seeking to align their SRI communication and approach. What could be more transparent for a fund focused on renewable energy, than refusing to invest in any business that operates in the fossil fuels sector? Another striking exclusion is that of the agro-chemical industry for funds focused on the environment or climate change. A final example present in such funds is the exclusion of industries linked to overland and air transport. Other than this screening dimension, the company selection process is also inventive. The ESG selection of businesses is rarely done uniformly, as is often the case for non-thematic SRI funds. For environmental funds, managers adopt practices that vary depending on whether they are assessing small businesses or large multinational corporations with numerous divisions, innovative industries or businesses in traditional fields with a developed eco-efficient strategy. This leads a number of funds to select stocks on the basis of a full-fledge environmental analysis of the life cycle of the underlying businesses (from production to products). This selection is combined in some cases with specific research aimed at avoiding major social problems, but without applying a strict screening that would weight down the process and potentially exclude small, fast-growing businesses. Other practices, assimilated to flexible SRI approaches, in particular for funds qualified as Broad SRI, are also worth considering: the creation of advisory boards made up of independent experts, the measurement of the CO 2 impacts of funds and comparison with benchmarks, voluntary carbon offsets and the sharing of fund profits with environmental NGOs. Still a need to improve explanation and transparency All of these practices are interesting, but they present the risk of confusion. Some asset management firms attempt to ensure access to precise information on the environmental selection process and its consequences on fund composition. This is particularly the case for SRI thematic funds, although best practices are far from being widespread. Sometimes it is necessary to carry out an in-depth investigation to analyze the themes that are rather difficult to understand. Novethic regrets that it is often very difficult for the end subscriber to understand how a theme such as climate is integrated into the financial management process. French aspects With respect to the funds presents on the French market, this study highlights two points: French investors have a wide range of thematic approaches to choose from, reflecting the diversity of the European array. As for SRI environmental thematic funds, France is noteworthy for the near absence of environmental exclusions (such as nuclear, GMOs, toxic products or technologies that pollute). 6

7 INTRODUCTION Concepts and terminology WWhat does the term environmental thematic funds mean, and what differentiates them from traditional SRI funds, which also have an environmental dimension? These funds respond to several approaches: Sectorial approach (eco-innovative or trailblazing businesses): Companies are chosen based on their business activity. This approach covers sectors such as water, waste or energy management selected on a single (water, new energy funds, etc.) or multiple sector basis (eco-tech funds). This approach raises the question of what the minimum percentage of environmental activities of a business should be to warrant inclusion in a portfolio when it is not a pure player. Thematic approach (eco-efficient or leading businesses): Companies in the portfolio operate in a variety of sectors and are chosen on the basis of their environmental practices. We often find large caps in these funds, which in the end are not much different from traditional SRI funds in terms of portfolio composition. This approach is presented under global names (environment or planet) or more specific ones (climate change, energy efficiency, sustainable resources, energy or water savings, materials). Other practices which are specific to environmental funds, such as profit-sharing with environmental NGOs, the measurement and offset of the fund s CO 2 footprint, etc. These approaches are quite often combined (several funds, for example, are composed of both eco-innovative and eco-efficient businesses), mainly in the interest of diversifying the investment universe and limiting risk. The first part of this study distinguishes between the various practices and classifies them, a task that is sometimes complicated because fund names do not always reflect their content or their management strategy. The second part of the study seeks to analyze how, in the management of these funds, ethical and/or SRI issues are taken on board in addition to the environmental thematic approach. By SRI approach, we mean how managers take into account Environmental, Social and Governance (ESG) practices, either upstream or downstream from financial and environmental considerations. While numerous asset management firms present their environmental thematic funds as an integral part of their sustainable or SRI range of funds, it is in fact important to ensure that all of the sustainable development criteria, and not only environmental criteria, are taken into account. 7

8 INTRODUCTION Panel and terminology The study covered a sample of 194 environmental funds registered in Europe. The research conducted by Novethic led to the identification of around one hundred such funds. The databases of Morningstar and Lipper Feri rounded out the panel. Around 23 environmental funds were identified at the outset. About thirty funds were ruled out because they were: Sectorial funds with no environmental bias (fossil fuels or mining resources primarily) SRI funds whose environmental dimension is not sufficiently emphasized (the environment is merely overweighted compared to social and governance aspects) SRI funds whose thematic environmental bias is limited to less than 2 of their total assets Funds of funds whose management decisions are indirect. Thematic funds focused on other sustainable development criteria such as health, demographic aging or food issues were excluded from this study because few of them have adopted a global ESG approach. Funds invested in carbon quotas were also excluded from the scope of the study. This is a specific asset class that does not address the same imperatives as environmental funds invested in the listed companies examined in the research. Without claiming to be exhaustive, in particular because some of the funds are not widely distributed abroad, and are not subject to information disclosure outside of their country (and language) of origin, Novethic considers that the work conducted to compare numerous specialized and general sources ensures that the survey sample is broadly representative of the current landscape of environmental funds in Europe. NB : Several ETFs were included in the survey. In fact, even though ETFs are not considered to be actively managed funds, we have observed that most environmental ETFs are pegged to ad hoc indices. Thus the analysis for these funds is done during the creation of the index itself: sectorial choices and themes, investment universe, size of capitalizations, etc. The sample of funds thus put together was examined to see to what extent SRI criteria are taken into account and how environmental themes are approached. The study divides the funds into two universes: Thematic funds focused on the environment with no SRI processes. SRI thematic funds, which combine an environmental thematic approach with an SRI approach. Among the SRI thematic funds, we can distinguish between Core SRI thematic and Broad SRI thematic funds 1 : Core SRI thematic implies that fund management is relatively structured in terms of tracking ESG performance and using it in stock-picking, in some cases also applying sector-based exclusions (tobacco, arms, aviation, etc.), normative exclusions (respect for human rights) or environmental exclusions (non-renewable resources, pollution, etc.) Broad SRI thematic implies that stock-picking relies first and foremost on thematic and financial considerations, but that some approaches are borrowed from SRI management, without direct and systematic impact on stock-picking. This includes management that uses exclusions, or that practices non-constraining tracking of the ESG practices of the businesses in the portfolio. This approach can be practiced by teams that have expertise in SRI funds without the usual constraints associated with this type of management. 1. This terminology is used by Eurosif, a European organization that promotes SRI, to describe the various SRI practices in Europe in its survey, which is published once every two years. The most recent one was published in October 28. See: 8

9 I. Survey of funds in the global sample The global sample is made up of 194 thematic funds focused on the environment and registered in Europe. A. History of environmental fund creation In the graph above, we can see that environmental funds, the first of which were launched in 1984, underwent steady but limited development in the following twenty years or so. Starting in 26, this trend broadly accelerated, reaching a peak in 27 when nearly 8 funds were launched in a single year. Since then, the fallout from the subprime crisis seems to have had some impact on the pace of innovation in 28, we have so far seen the creation of only 35 funds (comparatively, between January and September 27, 55 funds were created). The oldest funds on the market were created by Swedish, English, French and German asset management firms. The last two years have seen the emergence of funds from all countries. Still, the most dynamic asset management firms are in France (28 new funds), Germany (21), Switzerland (13) and the UK (12) Breakdown by launch date sample : Global Source : Novethic B. Geographic survey Today, most European countries offer thematic funds. Our survey sample lists funds that originate in 19 countries: FRANCE GERMANY UNITED KINGDOM SWITZERLAND NETHERLANDS BELGIUM IRELAND SWEDEN FINLAND AUSTRIA LIECHTENSTEIN SPAIN NORWAY CZECH REPUBLIC DENMARK HUNGARY LUXEMBOURG PORTUGAL SLOVENIA

10 I. SURVEY OF FUNDS IN THE GLOBAL SAMPLE Breakdown by country of management Sampel : Global Source : Novethic 28 5 IRLAND 5 BELGIUM 5 NETHERLANDS 17 OTHER 14 SWITZERLAND 16 2 FRANCE 18 GERMANY UNITED KINGDOM This sample shows that four countries lead the pack in terms of the number of funds they offer: France, Germany, the United Kingdom and Switzerland. If we examine the country in which these same funds are registered, the distribution varies considerably: 44 of the funds are based in Luxembourg. This is due to the ease of distribution in other countries for funds registered in Luxembourg. France is second to Luxembourg (17), followed by the United Kingdom (7) and Ireland (5). C. Investment regions 82 of environmental funds have a global investment universe, while 1 of those invest in Europe, with the rest divided among national investment funds (often relatively specific thematic funds). Within the funds, European companies are generally predominant but there are non-negligible percentages of US, Canadian, Chinese and Japanese assets. D. Size of compagnies Environmental funds have always had a mid-cap bias. This means that, unlike traditional SRI funds, mainly invested in large corporations, they are far more invested in small and mid-sized companies. However, we have recently been witnessing an increasing degree of concentration in sectors such as water, waste management and the exploitation of renewable energy, as well as the emergence of global leaders in the production of aerogenerators and solar panels. This, along with the development of funds adopting a cross-disciplinary thematic approach (energy efficiency, pollution control), has gradually led to the appearance of environmental funds that still include small and mid caps but whose principal investment positions are often large caps or even blue chip stocks. 1

11 E. Themathic and sectorial approaches I. SURVEY OF FUNDS IN THE GLOBAL SAMPLE Environmental thematic funds serve as a laboratory for innovation with respect to the integration of extra-financial criteria. Managers adopt multiple approaches and many seek to be relatively original and more accessible to end investors. This is good news for responsible finance, since ethical screening funds, just like SRI funds of the ESG best-in-class type have a hard time winning over retail clients, who often have a hard time telling the difference between these funds and conventional funds. This level of innovation nonetheless means that it is even more important to ensure transparency and clarification efforts on the thematic management strategy in use and its impact on the stock universe. Accordingly, we have tried to categorize the different approaches used, and to compare them to the themes suggested by the names given to the funds as well as the communication surrounding these new products. The marketing of these funds can be structured around 6 distinct concepts: The most frequent can be called green funds (or environmental funds); Followed by funds presented on the basis of their alternative energy focus (also new, renewable, clean or future energies); A growing proportion of funds is presented as interested in issues pertaining to climate; The funds with a blue theme are focused on water-related issues; A non-negligible percentage of funds are focused on the concept of sustainability; Finally, a number of wood or forest funds are interested in issued related to forestry. Theme suggested by fund name Sample : Global Source : Novethic 28 SUSTAINABILITY BLUE 13 1 WOOD 2 4 GREEN 15 CLIMATE 2 ALTERNATIVE ENERGY 11

12 I. SURVEY OF FUNDS IN THE GLOBAL SAMPLE After studying the different methodological approaches offered on the European market, Novethic has opted to present funds in accordance with a classification made up of the 7 thematic categories indicated below: Water funds: the companies in which these funds invest operate in areas related to the management, the distribution and the treatment of water. Renewable Energy funds: these funds invest in companies related to renewable energy (manufacturing, development and operation). Forestry funds: assets are invested in stocks related to the wood industry or forestry operations. Environmental Sectors funds: assets are invested in businesses that mainly operate in water, renewable energy and waste management. Climate Change funds: assets are invested in businesses that produce renewable energy or that seek to reduce energy use (here we often speak of energy efficiency, and the companies targeted are generally those that produce eco-efficient materials or technical solutions) 2. Multi-Approach Environmental funds: assets are invested in businesses related to climate change (renewable energy and energy efficiency) and other environmental sectors (water and waste management in particular). Sustainable Development Thematic funds: they encompass two philosophies: - Funds that combine multi-approach environmental strategies and other themes that are deemed sustainable (such as health); - Funds that do not restrict the range of sectors in which they invest, but that select businesses on the basis of their environmental performance compared with their industry peers. As for this last category of thematic funds focused on Sustainable Development, we found that around 2/3 combine environmental and other thematic approaches (health in particular) and about 1/3 select businesses from every sector based on their environmental performance. 2. For the classification of Climate Change funds, we chose to rule out approaches related to adapting to climate change, because the activities they cover most often fall within the scope of business that Novethic considers to be described as broader multiapproach or sustainable development. The UBS (Lux) EF-Eco Performance fund illustrating a broad thematic approach The diversity of the business sectors present in the portfolio is the result of a combination of the two approaches of the Sustainable Development Thematic funds category: an environmental selection is made for large caps and a combination of thematic approaches (environment, health, mobility, habitation, food) is used for trailblazing businesses. An analysis of the sectors in the portfolio and of the 1 biggest investments of the fund underscores the apparent gap between the main stocks in the portfolio and its environmental thematic aspect. Indeed, as of September 3, 28, the fund was invested in Citigroup Inc, General Electric Co, Intel Corp, Procter & Gamble Co, Nestlé SA, Roche Holding AG, Symantec Corp, Sysco Corp, Vodafone Group Plc, Microsoft Corp. 12

13 I. SURVEY OF FUNDS IN THE GLOBAL SAMPLE Water, Renewable Energy, Forestry and Environmental Sector funds are generally invested in pure players. In the case of the three other approaches, we find specialist players and global players, for which the manager is expected to verify the portion or percentage of business that corresponds to the chosen theme. Fund classification by thematic category Sample : Global 19 SUBSTAINABLE DEVELOPMENT THEMATICS 25 MULTI-APPROACH ENVIRONMENTAL 11 2 CLIMATE CHANGE WATER 9 RENEWABLE ENERGY 2 FORESTRY 14 ENVIRONMENTAL SECTORS This in-depth survey of identified funds has led Novethic to reclassify some funds (hence the divergence between the two preceding graphs). The concept presented by the asset management firm does not necessarily correspond to the observed category. This is relatively rare for mono-sector strategies (water and forest funds in particular), but is much more frequent for the combined strategies. Thus, funds presented as linked to climate change are, in our view, multi-approach funds if they include companies working in waste treatment; clean energy funds will be classified here as climate change funds if they combine renewable energy players and companies that are active in promoting energy efficiency. Generally speaking, we often see that the trend is towards broadening the eligible investment universe compared with the more restrictive thematic suggested by the name of the fund or the marketing associated with it. This attempt at diversification is legitimate to a certain degree when its aim is to reduce risk and when it is not excessive. However, it appears that for some funds, this latitude is taken to such an extent that the composition of the portfolio is totally disconnected from the thematic that is advertised. 13

14 I. SURVEY OF FUNDS IN THE GLOBAL SAMPLE Some quantified data support these analyses: Among the funds presented as investing in renewable energy (2 of the global sample), 41 are indeed invested only in renewable energy, while 46 are classified under climate change (i.e., invested not only in renewable energy but also in all energy efficiency industries), 8 combine renewable energy and other environmental sectors (water and waste management), and 5 combine all of the preceding approaches (i.e., our multi-approach environmental fund classification). Breakdown of funds by actual category Sample : Funds that claim to have an Alternative Energy theme MULTI-APPROACH ENVIRONMENTAL 5 8 ENVIRONMENTAL SECTORS 41 RENEWABLE ENERGY 46 CLIMATE CHANGE Similarly, among funds sold as being oriented towards climate change (15 of the sample), only 48 in our opinion are actually attributable to the climate change category (renewable energy and energy efficiency), while 38 are classified as multi-approach environmental, meaning that they combine the climate change approach with other environmental sectors (water, waste) whose link to climate change is relatively indirect. The rest are divided between broad thematics (environmental sectors or sustainable development) and funds that could not be classified due to the lack of available information (this is the case for Deutsche Bank, European and North American Climate Opportunities funds). Finally, funds presented as green (or as related to the environment), which account for 4 of the sample, are legitimate 72 of the time (environmental sectors, multi-approach environmental, climate change or forestry). However, the remaining 28 are funds with a broader Sustainable Development thematic bent. The French fund Etoile Environnement (Etoile Gestion) is a case in point. 14

15 I. SURVEY OF FUNDS IN THE GLOBAL SAMPLE Another way of presenting these observations: the funds that we have qualified as sustainable (i.e., that combine highly varied approaches and sectors) represent 19 of the survey sample. Of these, only 32 clearly present this approach in their communication or in the fund name. The remaining 68 in fact present more restrictive themes (the environment (62) and even climate or water in two cases). Fund analysis by stated message Sample : Funds that claim to have an Alternative Energy theme CLIMAT BLUE SUSTAINABILITY 62 GREEN Conversely, funds presented as blue (or as related to water) are relatively faithful to their associated communication since, of the 25 funds listed (13 of the survey sample), 88 are in fact attributable to the water thematic; the three remaining funds were classified under broader thematics (multiapproach environmental, environmental sectors and sustainable development). Let s observe the breakdown by thematic category of funds created in the course of recent years. Breakdown by launch date and thematic category Sample : Global FORESTRY RENEWABLE ENERGY WATER 5 ENVIRONMENTAL SECTORS CLIMATE CHANGE SUSTAINABLE DEVELOPMENT THEMATICS 1 1 MULTI-APPROACH ENVIRONMENTAL In the last two years, the distribution between the various types of environmental funds has evolved. In 27, we observe the success of climate change and environmental multi-approach funds (a combination of a climate change approach and other sustainable sectors such as water and waste management), as well as the relative regularity of renewable energy, water and environmental sector approaches. Conversely, we notice a relative decline in the launch of very broad sustainable development thematic funds. 15

16 I. SURVEY OF FUNDS IN THE GLOBAL SAMPLE F. From a thematic approach to SRI The global sample is composed of 194 thematic funds, all focused on the environment and all registered in Europe. Among these funds, 112 conduct no ESG or ethical analysis or selection. Thus, Novethic considers them to be disconnected from SRI and has therefore listed them as non-sri thematic funds. As for the remaining 82 funds, Novethic has classified them as belonging to one of two categories: Core SRI thematic funds and Broad SRI thematic funds. They are analyzed in the second part of this study. The following graphs demonstrate the respective importance of these different categories. Breakdown by SRI approach Sample : Global 29 CORE SRI 58 NON SRI 13 BROAD SRI The breakdown among the three main fund categories differs from one country to the next. If we look at environmental thematic funds in the four most significant countries, we observe fairly clear differences, as the graphs below show. Breakdown by SRI approach Sample : Fonds managed : 25 1 CORE SRI in France in Germany in the UK in Switzerland BROAD SRI NON SRI Among the four countries that offer the most environmental thematic funds, France has the highest number of funds without an SRI approach, while in Switzerland such funds are in the minority. A comparison of these three approaches on the basis of the thematic categories selected above also shows a significant disparity. 16

17 I. SURVEY OF FUNDS IN THE GLOBAL SAMPLE Multi-approach sustainable CORE SRI BROAD SRI NON SRI Multi-approach Environmental Sustainable development thematics Environmental sectors Climate change Renewable change Water Forestry It is striking to notice that the proportion of funds that combine a thematic and an SRI approach is less visible in funds with strict thematics, with the exception of water funds. This is due in particular to the size of the underlying businesses, their sector and their origin. In fact, players in forestry or renewable energy remain relatively modest in size and are from various regions (Asia, Americas, etc.). Consequently, it is more difficult to obtain extra-financial information on these issuers than it is for businesses in the water industry or those in sectors related to energy efficiency (insulation materials, electrical systems and electronics, etc.), which are quite often European multinationals. Finally, let s look at the historical breakdown between traditional thematic funds and SRI thematic funds. Breakdown by launch date Sample : Global 2 NON SRI BROAD SRI CORE SRI

18 I. SURVEY OF FUNDS IN THE GLOBAL SAMPLE Data for the oldest funds suggest that some have seen their management strategy evolve: prior to 2, non-thematic structured SRI funds were in fact relatively rare. The most remarkable trend to emerge in this graph is between 26 and 27. This period corresponds to a phase where environmental issues particularly global warming began to influence the political, economic and hence the investment community, but also to a period during which environmental technologies, encouraged by favorable regulations, began to find profitable business or economic models. G. Assets under environmental fund management Fund assets exceeded 25 billion euros in early 28. Behind this figure hides a great deal of diversity, since some funds generally the most recent ones have assets worth a few million euros at the most, while the largest funds exceed the 2 billion euro mark (4 billion euros for the Blackrock fund). Indicatively, at the end of March 28, the financial management industry in Europe represented around 7 38 billion euros in assets. 3 The weight of Water and Renewable Energy funds is also striking: of the largest representative funds (85 of total assets), Water and Renewable Energy funds account for 31 and 25, respectively, of total assets under management, while in terms of number, they account for only 11 and 9 of the global sample. 19 SUSTAINABLE DEVELOPMENT THEMATICS 25 MULTI-APPROACH ENVIRONMENTAL 11 2 CLIMAT CHANGE WATER 9RENEWABLE ENERGY 2 FORESTRY 14 ENVIRONMENTAL SECTORS Number of funds by thematics category Sample : Global Breakdown of AUM by thematic category Sample : 32 top funds on 9/3/28 15 CLIMAT CHANGE 16 SUSTAINABLE DEVELOPMENT THEMATICS MULTI-APPROACH 7 ENVIRONMENTALNTAL 6 ENVIRONMENTAL SECTORS 31 WATER 25 RENEWABLE ENERGY 3. Source : EFAMA 18

19 I. SURVEY OF FUNDS IN THE GLOBAL SAMPLE H. Recent trends While 27 was a year of success for these funds, 28 saw a trend reversal due to the fortunes of the underlying stocks in these portfolios. AUM and performances mirrored these trends. Thematic funds assets and environmental stock prices have been very volatile in recent months. The crisis took a particular toll on the stock prices of some equities in environmental funds. The small and mid caps, which many investors preferred to flee for the large caps, have been particularly hard hit. These are nonetheless non-cyclical stocks and specialists hope they will be restored to health once the crisis is under control and investors are reassured of this industry s ability to continue to find adequate funding for environmental projects. In addition, we were able to calculate the change in the largest funds in terms of AUM (85 of the total), which showed a decline of 23.8 between January 1, 28 and September 3, 28. This plunge is comparable to the trends observed in the environmental indices, which suggests that environmental thematic funds were successful in avoiding massive investor withdrawals during this crisis period. What the specialists think The interview conducted by Newsmanager on October 8, 28 with Jon Forster, manager at Impax Asset Management of the Parworld Environmental Opportunities fund (a sub-fund of the Luxembourg mutual fund Parworld of BNP Paribas Asset Management); the news flash by Financière de Champlain on October 8, 28; and the Hugh Wheelan article called Green fund sales dive over credit crunch concerns, published on October 9, 28 by Responsible Investor: all comment on the reversal observed after the success of environmental funds in 27, and all express confidence due to the fact that this type of management represents a trend in fund management for the future. The in-depth survey of the nearly 2 funds in this sample attests therefore to the extreme diversity of environmental funds and to the rapid rise of environmental specialization. Their marketing tends to show a preference for climate, because this is one of the thematics that potential investors identify the easiest. It will be interesting to see if, in the future, new environmental approaches develop, such as biodiversity, if these approaches become standardized, or if communication around these funds is clarified. 19

20 II. Survey of funds in the SRI sample The second part of the survey focuses on the 82 thematic funds classified as Broad SRI (26 funds) and Core SRI (56 funds). Breakdown by SRI approach Sample : ISR 32 BROAD SRI 68 CORE SRI A. Broad and Core SRI approaches After observing all of the SRI approaches implemented by the managers of 82 environmental funds in Europe, Novethic has classified them into two SRI categories: Core SRI and Broad SRI. By Core SRI, we refer to the funds for which the integration of the SRI approach is the most structured. We use the term Broad SRI when the SRI approach is more loosely applied and does not automatically impact the stock-picking practices of the portfolio. Among the practices we discuss in more detail below (section D), the following are considered to be Broad SRI approaches: Those that use ethical, environmental or normative exclusions Those that allocate SRI resources (in-house SRI research or management staff involved in the management of the thematic fund or outside SRI analyses made available to managers) without having established extra-financial selection processes. Those that integrate, in a non systematic fashion, certain criteria that pertain to the ESG practices of businesses in stock-picking. All the funds whose management demonstrates a systematic impact of the SRI approach on the stock-picking process or combines enough of the criteria above are classified as Core SRI. 2

21 II. SURVEY OF FUNDS IN THE SRI SAMPLE B. History of SRI thematic funds Breakdown by launch date Sample : SRI 1 BROAD SRI CORE SRI Since the first environmental thematic funds were created, the proportion of funds that have adopted relatively structured SRI practices (Core) versus the proportion of funds that have adopted a more ad hoc approach (Broad) has remained constant. C. Analysis of SRI sample by thematic categories Here we take the categories used in the first part of the study, which qualify the thematic management approaches used. Multi-approach environmental 38 BROAD BR3 SRI Sustainable development thematics 28 BROAD BR2 SRI Environmental Sectors 43 BROAD BR4 SRI 62 CORE SRI 72 2 CORE SRI 57 CORE SRI Sample : SRI 78 CORE SRI Climat Change Renewable energy 22 BROAD BR2 SRI 33 CORE SRI 67 BROAD BR6 SRI Water BROAD SRI 1 CORE SRI Forestry CORE SRI 1 BROAD SRI We can thus confirm the trend mentioned above: while the water theme constitutes an exception to the rule, the management processes that integrate an SRI approach are globally more structured in this approach when the investment theme or themes are sufficiently broad. 21

22 II. SURVEY OF FUNDS IN THE SRI SAMPLE D. SRI practices followed The survey of ESG and ethical practices linked to thematic funds focused on the environment was conducted fund-by-fund, regardless of whether the practices fell under the Core SRI or Broad SRI category. We identified the following practices: 1. SRI selection practices ESG research, resources rolled out: For 66 of the funds in the sample, asset management firms explicitly mention that they use external analysts. The most frequently cited are the extra-financial rating agencies typically used in connection with the management of non-thematic SRI funds. They also mention specialist research institutes and/or committees made up of external experts. In 57 of the cases, the SRI management or analysis staff of the asset management firm is involved in the management of the environmental fund. Stock-picking based on ESG considerations Les pratiques relevées peuvent être classées selon quatre catégories : The practices revealed may be divided into four categories: a) The selection of all or some of the securities in the portfolio combines the thematic approach with a structured assessment of ESG issues. This approach, which is the most sophisticated as far as SRI practice goes, concerns about half of all funds selected as thematic SRI. However, the range and scope vary A few managers use this selection process for their entire portfolio. The majority use this selection process for large caps only or for eco-efficient companies in the portfolios. This is applicable to funds whose management is divided between pure players (trailblazers or eco-innovative) and multi-activity diversification businesses (leaders or ecoefficient). b) The selection of all or some of the securities in the portfolio combines the thematic approach with a structured evaluation of the environmental practices of the business. This practice, although less complete from an SRI perspective than the preceding one, is applied to more than a quarter of the funds, probably because it is in sync with their environmental aspect. In fact, if in stockpicking the manager assesses not only the environmental aspect of goods and services but also the environmental performance of their production, this leads to a stock-picking process for the fund based on an analysis of the life cycle of their activities. In this case, as in the preceding one, a fair number of managers restrict these considerations to large businesses rather than to segments of mid-sized pure players in their portfolios. This is unfortunate considering the significant energy consumption of the production of photovoltaic cells or desalination processes for salt water. c) The thematic approach to portfolio stock-picking is combined on a case-by-case basis with a process that selects businesses based on their ESG practices. This approach seeks to work around a systematic approach to stock-picking that is relatively constraining, and instead uses only the key criteria that are specific to each sector: controversial practices, the impact of regulatory change, the financial materiality of some criteria About a tenth of the funds apply this type of practice, although it is difficult to get a precise idea of their characteristics. 22

23 II. SURVEY OF FUNDS IN THE SRI SAMPLE d) The thematic approach to portfolio stock-picking is combined on a case-by-case basis with a process that selects businesses based on their environmental practices. This approach is used by only a few funds. Note that the frequency of various SRI portfolio selection practices observed and presented here remains indicative, since it is difficult to ascertain precisely. In fact, for the majority of those funds that distinguish between the approaches of eco-innovative businesses (businesses that are active in environmental sectors) and eco-efficient businesses (businesses that lead their industry with respect to their environmental practices), SRI practices are applied differently to different parts of the portfolio. This dual thematic approach is applied in nearly 2/3 of the environmental funds in the SRI sample, and is more or less focused on the ecoefficient or the eco-innovative part of the portfolio. Moreover, the relative weight of each approach is rarely specified and generally varies over time. In addition, transparency on SRI practices varies amongst funds: while some managers clearly communicate, others tend to be vague on their processes. Société Générale A.M. Equities Europe Environment, an environmental selection that combines eco-efficient and eco-innovative companies. For the Equities Europe Environment fund, SGAM based its approach on an environmental study conducted in 25 which stressed out the fact that the impact of environmental technologies (e.g. renewable energy) was positive but not sufficient. Hence, the portfolio was designed upon two approaches. One is sector specific and seeks alternative energy and pollution treatment companies; the other selects industrial companies with the best environmental practices according to Vigeo s assessments. By selecting the best practices among industries that have a significant environmental impact (raw material, extraction...), SGAM Equities Europe Environment provides a larger environmental benefit than regular cleantech funds. As a consequence, investors will find among the main holdings of the portfolio companies such as Lafarge or BP. This, of course, requires a strong clarification effort to avoid any risk of controversy. Such effort was implemented in October 28, with the launch of the website: As a final step, the explanation will have to reach the final investor, a job that the SGAM team has started to undertake. Banco Svensk Miljöfond, an environmental selection process that is integrated with thematic selection. The Banco Svensk Miljöfond fund is administered by Fonder Bank in cooperation with The Natural Step (TNS). The fund invests in companies that TNS identifies as leaders in the area of environmental requirements. The first step in the analysis is to examine what the businesses do. Those whose activity is totally at odds with the aims of the fund are excluded (for example, those that produce persistent chemical substances and have no intention of replacing them over time). For the environmental analysis of the business, several factors are then taken into consideration: its dependency on resources, its products and its strategic environmental involvement. Dependency on resources is analyzed base on the inflows (energy, commodities and transport related) and outflows (products and services, waste and emissions). The commitment of businesses to reducing these flows is also analyzed. The second step entails looking at the environmental policies as well as the management and environmental reporting systems. This is done by surveying published documents, questionnaires and the environmental reports compiled in the database of the Swedish Environment Protection Agency, as well as by onsite visits. Only businesses with the highest scores are included in the investment universe. A financial analysis is then done to constitute the fund. 23

24 II. SURVEY OF FUNDS IN THE SRI SAMPLE 2. SRI exclusion (screening) practices Traditional exclusions The original SRI approach, which consists of excluding certain sectors and businesses that are considered to have a morally unacceptable dimension, is also widely practiced in European SRI environmental funds ALL EXCLUSIONS ARMS TABACCO NUCLEAR GAMBLING ALCOHOL PORNOGRAPHY GMOS ANIMAL TESTING 6 FUR TRADE Traditional exclusions Sample : SRI The breakdown in screenings or exclusions that we were able to identify reflects trends that are similar to what we observe within non-thematic SRI funds: the predominance of exclusions linked to the arms, tobacco and nuclear industries. We can explain why this profile is not specific to environmental funds by the fact that some asset management firms apply ethics-based exclusions to all of their SRI funds. This implies, however, that these same firms link environmental funds to their SRI fund range. Note also that the exclusion of nuclear, genetic engineering and activities that involve the killing of animals for their fur has a dual purpose here. Indeed, these activities raise both ecological and ethical concerns. In the case of fur trade, in particular, we see both an effort to protect endangered species and a commitment to refrain from killing animals for their pelts. Specific environmental exclusions In connection with the thematics developed within these funds, some of the practices or activities that are controversial from an ecological perspective are excluded from the investment universe of portfolios. Eventhough these exclusions are less frequent than ethical exclusions, they deserve to be presented as a specific category and attest to a deeper assesment on the specific extra-financial issues pertaining to environmental thematics. In addition, they constitute a genuine marketing approach. In fact, presenting exclusions that are tied to current environmental controversies makes thematic management easier to understand, in particular when they are sold to retail clients who identify companies through their media coverage rather than through their environmental policy and reporting NUCLEAR GMOS IMPACT OF PRODUCTS (PVC, CFC...) IMPACT OF PROCESSES (POLLUTION...) ARGRO-CHEMICALS (FERTILIZER / PESTICIDES) FOSSIL FUELS / EXTRACTION ELEVAGE / SYLVICULTURE INTENSIFS / NON CERTIFIÉS 7 AERONAUTICS (MANUFACTURING ET TRANSPORT) AUTOMOBILE (MANUFACTURING AND TRANSPORT) 6 6 FUR TRADE Specific Environmental Exclusions Sample : SRI 24

25 II. SURVEY OF FUNDS IN THE SRI SAMPLE Among these practices we often find the exclusion of the following business activities or practices: Nuclear industries Genetic engineering Industries whose products have a high environmental impact (goods that damage the ozone layer, PVC, organic substances that are toxic and persistent) and/or if it appears that the principle of precaution is not respected Industries whose production has a high environmental impact without having developed a proactive policy towards risk prevention (depletion of natural resources, acceleration of climate change, warnings or fines from environmental agencies for causing serious pollution) Agro-chemical industries Extractive industries (extraction or sale of fossil fuels or commodities extracted from mines), with some funds limiting exclusions of this type to practices conducted in emerging countries in a particularly reprehensible way, or to certain commodities such as coal Intensive livestock farming, fishing that is not MSC certified, and forestry that is not FSC certified. Automobile or aircraft production Overland and air transport Fur trade. Note that for the environmental impact of products and production processes, the scope of screening is relatively difficult to ascertain, because it can be either vast or restrictive, depending on the investment philosophy that is embraced. More sporadically, some managers screen for: large-scale hydro-electrical production the production and distribution of bio-fuels (this is a relatively recent practice noticed among funds with a focus on renewable energy) xenotransplantiation (cell or organ grafting from one species to another), which raises both ethical and ecological questions the production and distribution of bottled water, hydrotherapy, swimming pools and controversial privatization projects involving water resources (these exclusions apply specifically to water thematic funds). Also note that, despite the growing environmental and public health issues surrounding nanotechnologies, there are no funds on the market that have positioned themselves to date against such technology under the principle of precaution, which nonetheless serves as a guiding light in some thematic approaches. In fact, a German fund registered in Luxembourg called Dr. Hoeller Prime Elements Earth, managed by IP Concept Fund Management S.A., presents nanotechnologies as a sustainable solution to the problem of depleting finite natural resources. 25

26 II. SURVEY OF FUNDS IN THE SRI SAMPLE The Scottish Widows Environmental Investor Fund, an environmental inclusion fund? This fund, invested mostly in UK businesses, is managed through an approach that is the opposite of environmental exclusion. In fact, although the fund is managed using exclusions (for GMOs, nuclear, aviation, chemicals that harm the ozone layer and intensive farming), these are balanced through the use of inclusive practices, i.e., practices that the fund gives preference to in its stock-picking process: businesses that use wood from sustainable forests companies that have substituted for CFC in aerosols or that control their CFC emissions related to the refrigeration of production units companies that have made specific commitments to paper and cardboard recycling, and/or waste recycling in general, glass bottle recycling, biodegradable packaging businesses that demonstrate an active policy of measuring their environmental impact businesses that have achieved significant reductions in energy consumption levels and those involved in the production of low-energy or eco-friendly consumer goods (insulation materials, solar heating, public transport, etc.) businesses involved in the inspection of nitrate, oil and chemical dumping into waterways or the atmosphere, as well as in water treatment businesses that actively avoid the use of endangered species as commodities (jewelry, cosmetics, etc.) businesses that take measures to preserve the natural habitats of threatened flora and/or fauna businesses involved in growing, producing and selling organic goods businesses that refuse to use drugs or hormones that increase yields (intensive farming) businesses that sponsor environmental projects businesses that demonstrate their commitment to employee health and well-being and workplace safety 26

27 II. SURVEY OF FUNDS IN THE SRI SAMPLE Normative exclusions Normative exclusions are present in more than a third of the funds. They verify that the stocks in the fund are issued by businesses that respect formal standards or major international conventions, offering guarantees that labor laws or governance issues are complied with, without going as far as performing an exhaustive analysis of criteria which, when they exist, are often limited to large caps. These practices limit the risk of controversy. The principal normative exclusions we identified are: The 1 principles of the UN Global Compact the OECD guidelines for multinational companies the Ottowa Convention the Fundamental Conventions of the ILO (International Labor Organization) the Universal Declaration of Human Rights the economic activities practiced in countries that do not respect Human Rights. As with ethical exclusions, some asset management firms implement such exclusion policies not just for their range of environmental funds, but for all of their SRI funds. Original exclusions Some funds have relatively original exclusion policies, partly in that they are not practiced by other funds but also because their link with the environmental thematic approach is not obvious: Banking Pharmaceutical industry Prostitution Businesses that have violated the International Code on mother s milk marketing in the developing world. Some of these screening practices are probably part of the ethical approach of SRI fund ranges. For others, it would be interesting to enquire about the manager s intentions. 3. Other SRI practices Measuring ex post the fund s environmental impact Three funds measure such impact: ASN Beleggingsfondsen NV, a Dutch fund, uses the Trucost measures to define the environmental impact of the ASN Milieu & Waterfonds fund. Similarly, Fortis Investment uses the Trucost measures to present the volume of CO 2 avoided per volume invested in FLF Green Future fund compared to a standard fund; Finally, Henderson Industries of the Future fund is presented as 4 more efficient in carbon than the MSCI World index. On average, 1M invested in the fund produces 458 tons of CO 2 compared with 761 tons of CO 2 for the same amount invested in the MSCI World Index. Henderson notes that this trend is improving each year since the introduction of CO 2 measurement three years ago. 27

28 II. SURVEY OF FUNDS IN THE SRI SAMPLE Offsetting the environmental / CO 2 impact of the fund The managers of two funds in the SRI sample say that in 27 they offset all CO 2 emissions related to stocks in the portfolio: Banco Ideelthe Miljöfond and Banco Svensk Miljöfond, both managed by Banco Fonder AB. This was done in part through the purchase of carbon credits as part of the clean development mechanism under the Kyoto Protocol. Profit-sharing with environmental NGOs The managers of five of the funds in the sample have opted, among other practices, to share fund profits with environmental NGOs: Actions Planète Durable, an Alcyone Finance fund, donates half of the fixed management fee it earns to France Nature Environnement, which also helps to define management orientations. The two funds Banco Ideel Miljöfond and Banco Svensk Miljöfond, managed by the Swedish firm Banco Fonder AB, offer the investor the choice of an environmental NGO within a pre-defined selection. It then pays 1 of the fund s profits to the NGO. With the Skandia Världsnaturfonden fund managed by Skandia Fonder AB, the profit-sharing with the WWF also takes the form of a collaborative fund management relationship. In addition, the fund has taken the name of the NGO: the Skandia World Wildlife Fund (translated from Swedish). The Triodos Values Pioneer Fund has a wider scope because Triodos pays 4 of fund entry fees to its associative partners, provided that the client makes this explicit request at the time of investment. If the client opts for the Alternative Finance Network, the website can be used to choose the association or organization that will benefit from among the 7 NGOs that make up the network. They include Amnesty International, Alterfin, Les Amis de la Terre (Friends of the Earth), Christoforusgemeenschap, Entraide et Fraternité, Gaia, Le Gracq, Gewenst Kind, Greenpeace, Les Magasins du monde-oxfam, Mercurius, Natuurpunt, Netwerk Vlaanderen, Oost West Centrum, RNOB, De Sterrewijze, Talander, Velt, WWF Belgium. Formation of a committee of independent environmental experts To validate the environmental thematic approaches and management decisions, some asset management firms resort to a committee, generally made up of independent experts and sometimes also including partners linked to the fund.. KBC AM has the most targeted communications on this subject among asset managers. Its environmental advisory board lends its support and expertise to the process of selecting eligible businesses. It meets three to six times a year, and works in multiple phases, beginning with the task of defining, in conjunction with the SRI team, trailblazing sectors that are eligible for investment by environmental funds It also validates the analytical criteria used to make ESG assessments of businesses. During the last step in the validation process, and after the internal analysis of the business, the board ensures that the business meets the conditions set for the fund (i.e., at least 5 of its revenue is linked to the trailblazing technique or technology that has been identified, or this figure exceeds 1 and it is a leader in this particular sector of activity). The board is made up of experts in the different fields: economic policy, business ethics/compliance, environment, human resources and human rights. The experts (two for each field) are all academics from several universities in Belgium and the Netherlands. At Alcyone Finance, as part of the management of the Actions Planète Durable Fund, an ethics committee, in which members of FNE (France Nature Environnement) participate, meets twice a year to express its views on portfolio composition. At Ökoworld Lux. SA, sustainable development criteria and the investment areas that are specific to various thematic sub-funds of the Ökoworld fund are defined by an independent advisory committee. This committee is also responsible for validating the extra-financial analyses performed in-house, and thus approves about 1 to 15 stock investment per quarter before they are added to the funds. 28

29 II. SURVEY OF FUNDS IN THE SRI SAMPLE Engagement Some managers stress their engagement practices with businesses as an SRI supplement to a thematic approach focused on the environment. The engagement consists of establishing a dialogue on ESG issues with the businesses, in the interest of getting them to evolve away from objectionable practices. F&C Asset Management is one of the most active in this area. E. Transparence Although classifying practices related to reporting and transparency is relatively complex, general trends can be noted. What we observed in the course of conducting this survey shows that for the most part, environmental funds that demonstrate the most evolved SRI practices are also the most transparent about how they implement thematic management and on their impact in terms of the portfolio. A few interesting examples are worth noting: Barchester Green has a fairly complete website that offers a description of the businesses present in the Barchester Best of Green Life Fund s portfolio (classified as Broad SRI) and a questionnaire for clients on their SRI, environmental and ethical expectations. Jupiter Investment also presents a description of the main activities and environmental characteristics of the top 1 investments of its Core SRI environmental funds. Ecofi Investments, whose Ecofi Sustainable Development fund has been selected as a Broad SRI thematic fund, plans to present on its website (as it already does for non-thematic SRI funds) a detailed description of the main activities and ESG characteristics of all of the companies in its portfolio. KBC Asset Management, whose environmental funds are classified as Core SRI thematic funds, presents all of the SRI ratings of the stocks in its portfolio, the inclusion and exclusion thresholds used and the methodological aspects of the SRI selection. 29

30 III. Focus on distribution in France Depending on the case, we draw a distinction here between the characteristics of funds distributed in France (by French and foreign firms) and those proposed by French asset management firms. Percentage of funds distributed in France Sample : Global 58 NON DISTRIBUTED IN FRANCE 42 DISTRIBUTED IN FRANCE 29 CORE SRI 58 NON SRI 29 CORE SRI 58 NON SRI 13 BROAD SRI Breakdown by SRI approach Sample : Global 13 BROAD SRI Breakdown by SRI approach Sample : Funds distributed in France Breakdown by country of management Sample : Global OTHER IRLAND BELGIUM 5 NETHERLANDS SWITZERLAND 16 2 FRANCE 18 GERMANY UNITED-KINGDOM 3

31 III. FOCUS ON DISTRIBUTION IN FRANCE Breakdown by country of management Sample : Funds distributed in France 12 OTHER 9 IRLAND 12 NITED-KINGDOM 46 FRANCE 21 SWITZERLAND The origin of the environmental funds sold in France is relatively representative of the product breakdown in Europe, although France and Switzerland are over-represented, while German funds are virtually absent. SUSTAINABLE DEVELOPMENT THEMATICS 19 11WATER 9 RENEWABLE ENERGY 2 FORESTRY Fund classification by thematic category Sample : Global 25 MULTI-APPROACH ENVIRONMENTAL 2 CLIMAT CHANGE 14 ENVIRONMENTAL SECTORS SUSTAINABLE DEVELOPMENT THEMATICS WATER 1 RENEWABLE ENERGY Fund classification by thematic category Sample : Funds distributed in France 2 MULTI-APPROACH ENVIRONMENTAL 17 CLIMAT CHANGE 2 FORESTRY 15 ENVIRONMENTAL SECTORS The classification by thematic category of funds sold in France is very comparable to what is observed in Europe. 31

32 III. FOCUS ON DISTRIBUTION IN FRANCE Breakdown by launch date Sample : Global (orange) / Funds ditributed in France (red) About half of the funds created each year are sold in France, except for the oldest ones, which are often Nordic or Anglo-Saxon and restricted to these markets. Breakdown by SRI approach Sample : Global 68 CORE SRI 32 BROAD SRI 22 BROAD SRI 29 BROAD SRI 78 CORE SRI Breakdown by SRI approach Sample : Funds ditributed in France 71 CORE SRI Breakdown by SRI approach Sample : Funds managed in France In Europe, the majority of SRI environmental funds fall under the Core SRI approach rather than Broad SRI. This phenomenon is more marked for funds managed in France, and even more so for those distributed in France. 32

33 III. FOCUS ON DISTRIBUTION IN FRANCE 8 Traditional exclusions SRI Sample SRI Sample Funds distributed in France SRI Sample Funds managed in France ALL EXCLUSIONS ARMS TABACCO NUCLEAR GAMBLING ALCOHOL PORNOGRAPHY 9 GMOS ANIMAL TESTING FUR TRADE While funds distributed in France practice less exclusion than the global SRI sample, funds managed in France are particularly resistant to this practice. Exclusions environnementales spécifiques 8 SRI Sample SRI Sample Funds distributed in France SRI Sample Funds managed in France ALL EXCLUSIONS 29 NUCLEAR OGMS IMPACT OF PRODUCTS (PVC, CFC...) IMPACT OF PROCESSES (POLUTION...) AGRO-CHEMICALS (FERTILIZER /PESTICIDES) FOSSIL FUELS / EXTRACTION INTENSIVE LIVESTOCK / FORESTRY / NON-CERTIFIED) AERONAUTICS (MANUFACTURING AND TRANSPORT) AUTOMOBILE (MANUFACTURING AND TRANSPORT) FUR TRADE WATER RELATED CONTROVERSIES XENOTRANSPLANTATION 2 Similarly, we note that French fund sellers are reluctant to engage in marked positions that involve specific environmental exclusions. Not a single fund managed in France excludes the producers of pesticides, GMOs or fossil fuels, and the nuclear industry a common exclusion abroad is never subject to screening. A telling illustration of this phenomenon is provided by the management of the Swiss bank Sarasin. For the distribution of its products in France, it has opted to eliminate all of the exclusions it applies in other countries. As for normative exclusions, we see the same trend globally. Of the 3 funds that use this approach, only one of them is from the French-UK management of BNP PAM Impax AM, and just six of these funds are distributed in France (one fund from Dexia, one from Fortis, one from Henderson, one from Ökoworld and one from Pioneer). 33

34 34 APPENDIX I Analysis of the top 1 holdings Companies in the portfolio s top 1 holdings Sample : 47 SRI funds VESTAS WINDSYSTEMSS 36 GAMESA CORPORATION ON 26 VEOLIA ENVIRONNEMENT NT SOLARWORLD AG AG ITRON INC INC ABB LTD LTD OESTERREICHISCHE HE ELEKTRIZIÄTSWIRTSCHAFTS AG G KURITA WATER INDUSTRIES IES Q-CELLS AG AG An analysis of the top 1 investments in some of the funds in the SRI sample, for which this information was readily available, enabled us to note the presence of major players in the production of aero-generators (Vestas Wind Systems and Gamesa Corp). Veolia Environnement is also very present, which is due to the diversity of its activities related to the environment and its global reach. The company is present in 71 of the Water funds in the SRI sample. The businesses that follow demonstrate the growing clout of the solar energy industry (Solarworld, Q-Cells) APPENDIX I : ANALYSIS OF THE TOP 1 HOLDINGS

35 APPENDIX II Focus on the main countries offering environmental funds: France, Germany, the United Kingdom and Switzerland Fund classification by country GLOBAL DISTRIBUTED IN FRANCE FRENCH FUNDS GERMAN FUNDS UK FUNDS SWISS FUNDS FORESTRY RENEWABLE ENERGY WATER ENVIRONMENTAL SECTORS CLIMAT CHANGE SUSTAINABLE DEVELOPMENT THEMATICS MULTI-APPROACH ENVIRONMENTAL Breakdown by SRI approach Sample : Funds managed in France 25 CORE SRI 1 BROAD SRI Sample : Funds managed in the UK 32 CORE SRI 26 BROAD SRI 65 NON SRI 42 NON SRI 29 CORE SRI 11 5 CORE C SRI Sample : Funds managed in Germany BROAD SRI 7 BROAD SRI 6 NON SRI Sample : Funds managed in Switzerland 43 NON SRI APPENDIX II : FOCUS ON THE MAIN COUNTRIES OFFERING ENVIRONMENTAL FUNDS: FRANCE, GERMANY, THE UNITED KINGDOM AND SWITZERLAND

36 APPENDIX II : FOCUS ON THE MAIN COUNTRIES OFFERING ENVIRONMENTAL FUNDS: FRANCE, GERMANY, THE UNITED KINGDOM AND SWITZERLAND FUR TRADE Conventional exclusions SRI Sample Funds managed in France Funds managed in Germany Funds managed in the UK Funds managed in Switzerland ALL EXCLUSIONS ARMS TABACCO NUCLEAR GAMBLING ALCOHOL PORNOGRAPHY GMOS ANIMAL TESTING 36

37 APPENDIX II : FOCUS ON THE MAIN COUNTRIES OFFERING ENVIRONMENTAL FUNDS: FRANCE, GERMANY, THE UNITED KINGDOM AND SWITZERLAND Exclusions environnementales spécifiques SRI Sample Funds managed in France Funds managed in Germany Funds managed in the UK Funds managed in Switzerland ALL EXCLUSIONS NUCLEAR R GMOS IMPACT OF PRODUCTS (PVC, CFC...) IMPACT OF PROCESSES (POLUTION...) ARGRO-CHEMICALS (FERTILIZER / PESTICIDES) FOSSILS FUELS / EXTRACTION INTENSIVE LIVESTOCK / FORESTRY / NON CERTIFIED AERONAUTICS S (MANUFACTURING G AND TRANSPORT) AUTOMOBILE E (MANUFACTURING G AND TRANSPORT) FUR TRADE WATER RELATED CONTROVERSIES XENOTRANSPLANTATION 37