Sustainable finance: the sore points

Sustainable finance: the sore points



For several years now, we have witnessed an explosion in the supply of so-called “sustainable” financial products. In your opinion, should this be seen as a real positive trend, a lot of greenwashing, or a bit of both?

I would say a bit of both. We are seeing a positive dynamic with today a certain number of players who are interested in these subjects, whether individuals, companies, investors or even regulators. This was much less the case five years ago. Opposite, the historic actors ofsocially responsible investment continue to offer products with credible commitments and to push environmental and social agendas. Whether you are a private or institutional investor, you can expect to find serious funds on the market.

At the same time, there are also a lot of “pipes” from actors who claim to be responsible. the greenwashing in asset management is materialized by many funds that claim to be SRI but for which we do not know what the investment lines and expected impacts are, and where ESG selectivity is quite low. Often, these are large portfolios, with very aggressive communication that is out of step with the reality of the products, which are not very convincing once you scratch a little.

We also hear more and more about impact. What do we observe today?

The impact remains a work in progress. Many actors today try to integrate impact goals in their investment choices, but if there are technical areas in which we manage to establish and monitor measurable progress relatively well (CO2 emissions, job creation, etc.), it remains more complex in other other themes. This is the case, for example, with the preservation of biodiversity, which we know is a major issue that must absolutely be covered in financial choices, but which we do not necessarily know how to measure well today. today. More generally, we see actors who are doing very interesting things around the notion of impact, while others have not yet integrated these subjects. On the other hand, if there is one thing in common, it is that everyone today claims to be interested in it.

Shareholder engagement, everyone talks about it, but do all investors play their role as actors committed to the companies they own?

Managers regularly cite shareholder engagement as one of the main levers for generating impact, but are the practices really in line with these discourses?

L’shareholder engagement, everyone talks about it, but do all investors play their role as committed players with the companies they hold? The answer is no. The reality is that the actors who announce that they have climate ambitions, for example, do not always have a voting policy aligned with this claim. A second question concerns the effect of these commitments, which is always difficult to assess. When a company changes, it is often due to different reasons: it can also be linked to reputational effects, consumer pressure, employee expectations… It is rarely shareholder engagement alone that changes issuers, except in specific situations such as capital control, as may be the case in certain private equity funds, for example. On the other hand, in a group where there are already questions, where the strategy is called into question or whose reputation is starting to flag, a strong commitment policy for certain investors can have a very significant impact.

Labels have an essential role to play in guiding savers in their responsible investment decisions. However, the SRI label has been strongly criticized in recent years. For what reasons ?

Within the scientific committee of the label, many of us have expressed strong expectations for its development from 2018… Its benchmark could, for example, introduce technical criteria on the exclusion of certain controversial sectors of activity such as coal or unconventional fossil fuels. There is also the question of the selectivity of the universe. The initial benchmark simply requires the elimination of companies that are among the 20% with the lowest ESG ratings, but this framework could be tightened. There could also be criteria relating to impact measurement or engagement.

The General Inspectorate of Finance published a very comprehensive report at the end of 2020, pinpointing the weaknesses of the label and the need to improve it. Two years later, we are still waiting. The current criticisms of the label are therefore largely justified. This can be an excellent tool for informing consumers who are unfamiliar with these rather complex financial tools. It still has to be robust and credible.

(…) the standard and the processes of the label must be improved, so that the technical reality is in conformity with the guarantee which one claims to offer to savers.”

Is the label currently suffering from a credibility crisis?

A labeled fund is no worse than an unlabeled fund. This is still a minimum guarantee on a number of points. The question is: does a labeled fund meet the expectations of an individual who wants his savings to be really well used in the context of the transition? Today, I’m not sure we can answer in the affirmative. It is for this reason that the standard and the processes of the label must be improved, so that the technical reality is consistent with the guarantee that we claim to offer to savers.

The standardization of practices also involves regulation, and we have seen a lot of regulations arrive in Europe in recent months. What is your point of view ?

The current regulatory turmoil in Europe is turning into a gas factory which could ultimately harm the objectives of sustainable finance. We should now look for a certain number of simplifications to prevent regulations from becoming an obstacle to the consideration of ESG issues. In particular, there is an inflation of working groups which worries me a little.

Conversely, should we regulate more on certain subjects such as ESG rating?

Not sure… all the answers are not in the regulations, except perhaps on two points: greater transparency on the sources of the data used and on the methods of aggregation leading to the ESG scores.

In your opinion, has the Orpea affair shown the current limits of ESG rating?

The limits, yes without a doubt. Like financial rating, ESG rating is far from perfect and there is still a lot of progress to be made in a context where, unlike financial rating, the basic data is still often poorly defined or even not yet produced by the companies assessed. . But it is still quite possible to evaluate companies in a granular way. Given the nature of the information sought, one approach is to better take into account the opinions of stakeholders (employees, unions, customers, NGOs, etc.). In the case of nursing homes, for example, the unions have long denounced the practices that were the subject of the scandal.

Market conditions seem less favorable to SRI funds since the start of the year. Can we fear, in your opinion, a lack of interest from investors, particularly individuals?

We can be worried, but overall, what research has shown for several decades now is that it is quite possible to have ESG funds displaying a financial performance comparable to that of their universe, in addition to having good extra-financial performance. We must seek both, but over time, and not with short-term adjustments based on inflation or macroeconomic crises. Since the start of the year, some SRI players have explained their underperformance by the underweighting or absence of oil and gas from their portfolios. But if these sectors are performing well today, will they still perform as well in the medium and long term? I hope not, otherwise the planet will not end up in a good state. You shouldn’t make your choices based on one-off crises. These sectors remain highly polluting, and if you are a responsible investor, you can possibly hold a little in a best-in-class or commitment logic to move the lines, but over time they are not necessarily preferred. Thus, it does not shock me to find TotalEnergies in an SRI fund, since the manager undertakes to push this company to invest in renewables and not in the exploration of new hydrocarbon fields. It is better to have investors of this type at TotalEnergies than shareholders solely motivated by profit and for whom the transition is an issue beyond the horizon…

We have seen in recent months a movement to question ESG, how do you view this trend?

With a slight annoyance! For years, the vast majority of the financial community rejected this concept of SRI, then in recent years, seeing real business opportunities in it, “interested converts” have been legion. Today, it is often the same people who throw the baby out with the bathwater a little too quickly. Those who have been working on the subject for a long time know that SRI can do a lot, but not everything. SRI is not intended to cover the entire market. But there is no doubt that serious SRI has real impacts and responds to major transition issues in particular.

What are the major challenges for the coming months?

There are many, but I can cite two: on the one hand, there is an important issue relating to training and education, including financial players, who have often taken up these subjects relatively recently and who need to improve their skills. The second challenge concerns issues of governance and shareholder engagement. If we want things to move, it is necessary that engagement practices are consistent with the discourse of the actors. This is the most effective way to align investors and companies. It is necessary to build discourses that allow business leaders to understand that they will be supported by investors if they undertake transition plans, even if profitability is stable or even lower for some time.

More generally, there is a need for clear market signals, especially with labels, while avoiding getting bogged down in debates on accounting subtleties that will not advance the issue. Finally, it is essential to remain firm on your convictions. Many studies have shown that it is possible to guarantee a minimum economic performance while respecting ESG objectives a little better. It must be hammered home because it is possible, and it is essential.

Find all of Investir Durable #13, the sustainable finance magazine.

Find the Investir Durable #13 file online.

Leave a Comment

Your email address will not be published. Required fields are marked *