For responsible and sustainable finance: between promises and challenges |  innovations |  The Innovation Research Network

For responsible and sustainable finance: between promises and challenges | innovations | The Innovation Research Network

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Leave a livable world to future generations! This growing concern of socio-economic and political actors now sounds like a leitmotif. After the vote on the European climate law in June 2021, the legislative package “Fit for 55” or “Adjustment to the 55 objective” has just been adopted at the end of June 2022 by the Council of the Union. European Union with thirteen legally binding legislative measures on energy and climate to meet the European objective of reducing net greenhouse gas emissions by at least 55% by 2030 compared to their 1990 level and achieve carbon neutrality by 2050. The European Commission estimated in 2019 an additional annual investment of 180 billion euros necessary to achieve the objectives by 2030, and additional funds to achieve the objective of neutrality carbon in 2050. Financial actors therefore have a crucial role to play and are involved in the transition to a low-carbon economy that is resilient to climate change. More generally, with the lessons of the crises (economic, financial, health and political), it is the financial ecosystem as a whole which is at the heart of the demands to transform itself and move towards a more responsible and sustainable finance and thus serve the ‘general interest.

Green cryptocurrencies, stable cornersESG derivatives, but also sustainability-linked loans are all financial innovations that arise in response to the challenges of more sustainable finance. Many investment funds have been awarded “sustainable finance” labels. There are about ten in Europe divided into two families: ESG labels (environmental, social and governance) and green labels. In 2021, these 1,799 funds represented €1,330 billion in assets under management in Europe. According to Novethic, in France, the size of the responsible funds market has almost doubled in one year.

While it bodes well for the “sustainable finance market” to develop, continued caution and oversight is needed to ensure that labeling and the increasing complexity of financial instruments do not lead to greenwashing.

What is sustainable finance?

Sustainable finance is a generic term that covers related names and concepts, such as ethical finance, responsible finance, solidarity finance, impact finance, social finance or green finance. A finance is sustainable in the sense of sustainable “ with regard to its impact on social relations and the investment decision (Lagoarde-Segot, Paranque, 2018). Thus what will characterize the field of sustainable finance is a reinvention of investment, both in the values ​​and individual aspirations of investors, and in the practices of financial institutions, and more generally of financial players, by integrating social, environmental and governance criteria to their analysis or by financing in a collaborative and participatory approach projects with social and/or environmental impact. The culture of investment is thus redesigned so that it does not only respond to a purely short-term financial logic but rather to a long-term logic to reconcile finance with societal issues.

Even though responsible innovation in finance today remains more of a challenge than a structured domain (Muniesa, Lenglet, 2013), we have been witnessing for several years the development of new products, processes and financial actors working towards sustainable finance. .

First of all, it is in reaction to the imperfection of the financial markets to adequately integrate the positive or negative externalities of a transaction which led the financial actors to integrate them themselves. Socially Responsible Investment (SRI), which appeared at the end of the 1990s in France, is part of this approach, which consists of creating selective evaluation methods for companies taking into account ESG criteria in addition to financial criteria. Debates still persist today on the relevance of valuation methodologies or techniques and selection criteria which vary according to analysts and do not allow comparability for investors. Furthermore, since a company’s social and environmental responsibility involves a set of players, and SRI has become a market, conflicts of interest may exist between several players in this market, for example between financial intermediaries and companies that produce and sell SRI indices. This is how Bruno Le Maire commissioned the Accounting Standards Authority (ANC) in 2019 to provide a harmonized framework for the various existing practices in terms of extra-financial rating. The challenge is to enable the comparability of extra-financial information at the international level to provide useful support for the decisions of investors but also for companies to manage the energy transition of their activities.

In addition, following on from the signature by the Member States of the Paris Agreements, the European Commission launched in 2018 an action plan for the financing of sustainable growth where it urges the financial sector to redirect capital flows towards a sustainable economy. Innovative incentive products have been created to deploy financial resources as a priority towards sustainable projects, with social (inclusion), environmental (to adapt to or mitigate climate change) or societal returns. For example, social impact contracts aim to finance innovative social programs such as integration into employment according to a financial mechanism that associates a social investor, one or more private funders and the State, which undertakes subject to conditions to be reimbursed and sometimes to pay a success bonus to the funders. Green bonds, as a debt financing instrument, are more dedicated to financing the energy transition. In 2021, the Auvergne Rhône-Alpes Region carried out a first green bond issue of €100 million to finance investments contributing to ecological and environmental transition. More recently, sustainable loans (sustainability-linked loans), aimed at financing the transition to sustainability, are binding for the borrower towards his banker in the achievement of social and/or environmental objectives, the interest rate being revised upwards if these objectives are not achieved. While these financial mechanisms are promising, measuring the social and/or environmental impact is tricky and is currently generating debate in the financial and academic world.

Finally, innovations have been facilitated by the development of technologies to promote collaboration and the participation of several players in the ecosystem in sustainable finance. For example, crowdfunding platforms, loans or shares, were initially created as an alternative solution to support societal projects. With hindsight, and despite its popularity, this form of financing today finds its limits both in its difficulties in supporting massive investments and in the risk of distorting the initial project with the arrival of more conventional players.

While these innovations can contribute to a certain extent to sustainable finance, professionals in the financial sector and researchers are calling for the removal of certain barriers that hinder the implementation of sustainable finance. These issues first come into play at the regulatory level. Current debates at European level around the taxonomy should gradually lead to the creation of a common reference system allowing a unified classification of economic activities considered to be sustainable to guide investment and financing decisions. But in addition to the debates around the introduction or not of an activity in the category of green and carbon neutral activities by 2050, transition activities or enabling activities, it is the availability of data that is lacking for the actors. due to the difficulties for companies to report on their environmental impacts. Moreover, the redirection of financial resources towards sustainable projects can only be effective insofar as institutional investors and the general public are made aware of sustainable finance. Banks could, for example, strengthen the information and training of their employees (as suggested by the Prudential Supervisory and Resolution Authority (ACPR) in 2019 on climate risks), but also of their customers, while the States could use taxation as a lever to encourage responsible investment. These efforts could be accompanied for some researchers by greater education of society in sustainable finance from secondary education and then in university education. Finally, studies call for improving the quality, availability, transparency and comparability of extra-financial information communicated by companies (eg de Cambourg, Gardes, 2020). These are the main challenges facing the financial ecosystem for a more sustainable and responsible finance.

References

De Cambourg, P., Gardes, C. (2020), Extra-financial data as a prerequisite for the development of sustainable finance, Journal of Financial Economics138(2), 193-208.

Lagoarde-Segot, T., Paranque, B. (2018), Finance and Sustainability: From Ideology to Utopia, International Review of Financial Analysis55, 80-92.

Muniesa, F., Lenglet, M. (2013), Responsible innovation in finance: directions and implications, in: Owen, R., Bessant, J., Heintz, M. (eds), Responsible Innovation: Managing the Responsible Emergence of Science and Innovation in SocietyLondon, Wiley, 185-198.

About the authors

Valérie Pallas is a lecturer in management sciences at the IAE Gustave Eiffel (Paris Est Créteil University) and a researcher at the IRG (Institut de Recherche en Gestion – EA 2354). His research focuses on issues of organization, control and governance of banks and questions the tensions related to the exercise by banks of their responsibilities vis-à-vis their stakeholders.

Sondes Mbarek is a lecturer in corporate finance at the Institut Mines-Télécom Business School (France) and a researcher at LITEM (University of Evry). His research focuses on financial innovation, crowdfunding, corporate governance and CSR.

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