“Green” or “sustainable” finance is a concept increasingly put forward, while global warming and its consequences have never been so felt. But this notion is still vague and takes on various realities. Many savers, and in particular young working people, are now keen to invest their money in investments that make sense, respect the environment and do not just give a return.
Labeled funds are available to them so that their savings contribute to the financing of a sustainable economy. They can, for example, subscribe to it as part of a life insurance policy or an equity savings plan (PEA), by contacting their bank adviser or by carrying out arbitration directly online.
In one year, the assets of sustainable funds open to French savers have almost doubled, reaching 278 billion euros at the end of December 2019, according to the indicator unveiled on February 11 by Novethic, an expert in sustainable finance and a subsidiary of Caisse des dépôts. They are made up of 50% equities, then monetary assets (28%) and bonds (16%), in particular “Green Bonds”. In addition to being sustainable, these funds are attractive from a performance point of view. Sustainable funds invested in equities posted a gain of 28% in 2019, higher than the performance of the CAC 40, which jumped 26% last year.
It remains to be seen what is meant by sustainable in the jungle of funds labeled or supposed to respect ethical and responsible criteria. Here are the different labels and types of funds existing in France:
ESG funds, integrating environmental, social and governance criteria
ESG criteria (environmental, social and governance) allow an extra-financial analysis of the company. They must ensure that multiple factors are taken into consideration. On the environment, waste management and the reduction of greenhouse gases are, for example, evaluated. On the social criterion, respect for the rights of employees, the subcontracting chain or the prevention of accidents are considered. Regarding governance, the independence of the board of directors and the management structure are, for example, verified.
If criteria other than those relating to the company’s financial performance and profitability are assessed, ESG criteria nevertheless remain “soft material”., emphasizes Anne-Catherine Husson-Traore, CEO of Novethic. “There are a lot of declaratives and a wide range of what is possible in ESG.”
Above all, there is no established limit from which a company is considered to be excluded because it is too far removed from ESG criteria. Shares of a large CAC 40 group, such as Total, can be integrated into an ESG fund if the company demonstrates good governance, while being much less virtuous from an environmental point of view.
The SRI label, for investments that are supposed to be ‘socially responsible’
The SRI label (socially responsible investment) defines a way of proceeding, of analyzing non-financial factors, but does not imply any obligation in the final composition of the asset portfolio. “While the SRI label guarantees the quality of the process of selecting stocks (corporate actions, editor’s note) on ESG criteria, it is not necessarily a guarantee of financing a greener economy”, specifies Novethic. This label does not exclude companies with activities in coal, oil or nuclear.
In 2019, the number of funds with the SRI label doubled, the Pacte law forcing insurers to offer at least one labeled product in the context of life insurance. The SRI-labeled offer thus represents 46% of the market for sustainable funds open to individuals, but only 20% of overall collection, according to Novethic. The audit of the funds to obtain the label is carried out by two organizations accredited by Cofrac, Afnor and EY France.
More and more foreign fund managers are present on this market in France, offering 62 labeled funds on a total of 263 SRI funds. There is also Banque Postale Asset Management with 35 SRI funds, Natixis IM with 31 funds and BNP Paribas Asset Management with 22 funds.
The Greenfin label, more demanding and excluding fossil fuels and nuclear
The Greenfin label – formerly the “Energy and ecological transition for the climate” (Teec) label – is “much more demanding than the SRI label”, according to Anne-Catherine Husson-Traore. Created by the Ministry of Ecology, this label is issued by Novethic, EY France and Afnor certification. It applies a taxonomy (classification) excluding fossil fuels and nuclear, as well as controversial companies violating human rights.
However, the exclusion is not total. According to the label’s reference document, a company with up to 5% of its activity in fossil or nuclear can find itself in a Greenfin fund.. In addition, while climate risk is better and better understood, the impacts on biodiversity of corporate activities remain much more complex to analyze. In addition, climate indicators remain very heterogeneous. Among them, we find the carbon footprint of the portfolio or its carbon intensity calculated on the basis of non-standard methodologies. One of the main challenges is therefore to be able to speak a common language.
The assets of Greenfin funds have “almost quadrupled” in one year, to reach 6 billion euros at the end of December 2019. They remain however far from the 128 billion assets of SRI funds. There were only 18 Greenfin-labeled funds open to savers at the end of 2019, including only seven equity fundsdue in particular to the difficulties in assessing the “green share” of listed companies.
More readable thematic funds, but by nature less diversified
In addition to ESG funds, labeled SRI or Greenfin, there are also thematic funds which are attracting more and more investors and represent 25% of sustainable funds. Their attractiveness is linked to their good performance, with an average gain of +29% in one year, but also to their visibility thanks to easily identifiable investment themes, such as renewable energies or water.
“Thematic funds are better marketed because they are easier to explain” to savers, believes Anne-Catherine Husson-Traore. The customer relationship is generally evolving, according to her. Salespeople will increasingly need to have “a real background on environmental issues”, in order to offer a clear offer, responding to the growing aspiration of individuals for environmentally friendly finance.
If thematic funds seem more readable, they are by nature more risky because they are less diversified, invested in only certain very specific activities. Of the 94 environmental funds listed by Novethic, some may be labeled SRI. The three with the largest collections in France in 2019 are linked to foreign management companies: the Danish manager Nordea and the American managers BlackRock and Fidelity. These funds together represent 4.8 billion euros in assets, out of the 41 billion in assets of environmental funds.
Find a common language for a clearer and more transparent offer
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Work is currently underway at European Union level to define a common classification of green activities and create a European label. If the States have reached a compromise, nuclear power remains a stumbling block and is the subject of intense lobbying, particularly on the part of France. The challenge lies in the establishment of measurement units and common standards, in particular so that savers can better direct their savings towards “green” funds.
Currently, several sustainable finance labels coexist in Europe, including the French Greenfin, the Belgian Towards Sustainability, the Nordic Swan Ecolabel in the Nordic countries and the FNG-Siegel in Germany. But there is “a lack of offers in many countries, the French market being one of the most mature in Europe”, recalls Anne-Catherine Husson-Traore. There can always be labels for investment funds, insurers and banks, but there must still be enough “green” companies in which to invest.
A lever for accelerating the transition of large groups is shareholder engagement. “Investment funds are starting to make use of it,” says Sarah Labbé, expert at the consulting firm Etios, which specializes in sustainable finance. Corporate shareholders, management companies – to which individuals entrust their savings – can campaign for the implementation of transition plans and vote on climate-friendly resolutions at general meetings. It is also a way to advance sustainable finance.
This article originally appeared on Business Insider France
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