InsurTech: ESG Risk underwriting is a solution we offer to the Insurance Market, with ESG Impact scoring and Physical Risk assessments;
SustainTech: we provide a unique ESG impact rating solution, allowing toscore the sustainable ESG impact of a company, a territory (city or region), a country, or a financial index / investment portfolio.
Among the 2020 initiatives worth noticing in Sustainable Finance, DBS bank engagement deserves a closer look. DBS is a Singaporean bank, regularly awarded, and one the biggest bank in Asia, outside China. Last June, the bank published its own taxonomy for sustainable and transition finance, which defines sectors considered as sustainable activities.
The DBS initiative was released the same month as the EU taxonomy for sustainable activities, whose official publication took place after several years of development, and which will come into effect in June 2021 in Europe. Technical appendices of the EU Taxonomy had been modified last November regarding the list of sectors, after a 4-weeks long concertation, and are expected to ben published very soon.
We propose hereafter a brief overview of both initiatives, not to judge which is the “best”, but in order to understand how these entities tried to solve the problem of defining a taxonomy for the ESG investments, in their respective contexts.
EU taxonomy for sustainable activities
We already discussed the EU taxonomy several times these last months. Its first merit is, simply, to exist. But all the limits that we evoked, are still present: lack of a defined threshold to define a sustainable fund, lack of precisions, and many questionable criteria, whose purpose is to indicate, depending of a sector, if a fund is sustainable, or not. The worst thing is that, to date, neither sanctions nor controls of how the taxonomy will be applied are defined… Clearly, every AM will do what it wants.
And, de facto, it’s already happening: cf. our article providing 3 key takeaways on AMs’ first taxonomy tests published by the PRI. This trend will, obviously, goes on, since, in matter of so-called sustainable or green funds, greenwashing is now the rule—especially in a market context where the Sustainable Fund share showed a steady and strong growth in 2020, despite—or probably, thanks to—the COVID-19 pandemics, and where the retail market is looking for impactful investments, aligned with its increasing environmental and social concerns.
As example, in France, a boom happened with the SRI labeled funds (“Label ISR”), with now 618 of them, including many ETFs. This label was a tentative to provide a guarantee of sustainability for a fund. Patently, nothing is more wrong—many of the labeled funds having Carbon intensive or controversial activities in their investments… and the label doesn’t provide any kind of a measure of the ESG impact… But how can “SRI labeled” funds be invested in non-responsible companies, one may ask? Simply because the label doesn’t require this to be granted. Almost all you need is a policy, i.e. a “good” intention, a home-made ESG strategy more or less restrictive depending on the AM. There is no obligation to provide a quantification of the positive impact for an investment to be granted with the “SRI Label”…
So, once more, a useless intention check, and eventually, as usual, a disappointed customer—thanks to a label whose objective was initially to foster the Sustainable Finance, and not to obfuscate even more the situation, and to contribute to the ambient greenwashing.
A first and very important point, is that a bank asked itself the good questions, and didn’t waited for an imposed regulation to address these issues but acted on it by itself.
The bank taxonomy provides us with a list of sectors, specifying for each if it is eligible to a green or transition label, or related to an SDG objective. And the result is… quite good! What is even better, was to start with the purpose in mind, with the target objective: the point of this taxonomy is to help end customers understanding if a fund is composed of sectors of activities having, or not, a positive impact on the three aspects: green, transition, SDGs. DBS then provides us with a list of existing initiatives which might help to check the sustainability of a company or a project.
The approach might seem a bit simplistic, at first, especially when the 20 pages of the DBS taxonomy is compared to the 100+ pages of the EU Taxonomy and its 593 pages of Technical Annex—but it definitively not the case, because the objective pursued is very clear: providing a “label” for the funds, and be transparent with the customer regarding its investment. Also, interesting to notice, is the fact that the bank has for objective to use this framework for every financial transaction, and so that it implies its use for real-world project funding, grants, etc.
Can a bank be considered sustainable with only 5% of its funds being managed according to SRI principle? Certainly not, obviously… and the last point is here to give the promise that everything will be controlled by an external, independent audit. Of course. Because if nobody is controlling or verifying such an initiative, it will have no credibility, indeed…
It is thus very reassuring to see an initiative such as DBS’s one emerging, despite the many difficulties inherent to the financial sector, and even more, to see it coming from a region, Asia (Japan exc.), there the SRI market is still underdeveloped respectively to the Western financial markets (EU, USA).
As the Asian market is now indeed becoming the driving engine of the worldwide economy, it is here demonstrating a strong will and vision, which will surely allow it to catch up with the (supposedly) more advanced markets, and maybe to quickly surpass them. The future will tell.
We will thus be impatiently looking forward to seeing if DBS will deliver on its promises and ambitions and will also have the courage to be fully transparent on the negative aspects, and the probable difficulties to be encountered along the path.
Providing truly positive ESG impact funds for the Sustainable Finance is not an easy task, and it requires difficult choices for an Asset Manager, among which divestments from rogue companies that no one wants to make due to their (strictly) financial ROI, a necessary transparency, which can put the bank in a delicate position—but, in the end, it is the only choice to create a truly positive economy.
The Virtual-Reality Grand Finale & Awarding Ceremony of SESA 2020 has been announced—do not miss this opportunity to discover the winners of this startup competition: Register here on EvenBrite to assist to the virtual reality ceremony, which will leverage Virbela VR technology, used to build engaging virtual worlds for remote work, learning, and events. Meanwhile, you can also explore the list of regional finalists.
For the second year, we had the pleasure to parcipate in the SESA jury, and we thanks the whole SESA team for that! This year, 7 countries are competing in 9 categories and each country will provide a national winner for each category to the Grand Finale jury: Startup of the Year, Best Newcomer, Founder of the Year, etc.
Germany is indeed a very interesting market regarding Sustainable Finance, with a high potential: despite the fact that the country is the largest European economy, it trails other countries on sustainable finance, and ranks as fourth regarding green funds. To remediate the situation, the country announced in 2019 its ambition to become a leading location for sustainable finance.
Participating to startups and entrepreneurs’ competitions is indeed a good way to get additional feedbacks on our startup pitch and business model, and the occasion to network.
Launching a business is always challenging, but probably even more in a context of worldwide pandemic with months spent in lockdown… but it was the occasion for us to focus on our product roadmap and R&D—and it allowed us to deliver several innovative products in a record time.
By voting for us, you will not only support Women Entrepreneurship in a domain, FinTech, were only roughly 10% of the startups have a women for CEO, but also support our project, IMPACTIN, which aims to support the global transition towards a Positive Impact finance, by providing Impact scoring of emitters (countries, regions, cities, companies) and investments portfolios, and regulatory compliance with sustainable regulations (EU Taxonomy, etc.)
The PRI released early September a report with case studies from 37 Asset Managers—including e.g. BlackRock, Crédit Suisse, Amundi—, which agreed to test their funds regarding the Green Taxonomy compliance, to be mandatory by the end of 2021. Beyond the exercise itself, positive and necessary, what are the results, and what can we learn? Here are our three key takeaways.
First, let’s start with the funds being tested: they are quite different, hence very difficult to compare. Some AM used fixed income, and others equity funds, another green bonds and climate change thematic funds, and even funds not proposed as “sustainable funds” on the market. Due to the heterogeneous nature of the funds, we cannot compare or benchmark the results.
The taxonomy integration approach are also very different, each AM having its own way—but usually the method is based on external rating providers, which doesn’t support today the taxonomy requirements with their existing ESG scores, designed well before the taxonomy. Some methodologies are based on several suppliers, well known for having divergent view of a same company—the “aggregate confusion” of ESG ratings pointed out by the MIT Sloan study. Another common constatation: the great majority of AM mention the lack of trustable and exhaustive corporate data. When data was lacking, “estimates” have been made. Such a limitation obviously leads to unprecise and subjective ratings… So, yes, we definitively see here that the traditional ESG rating approach hit its limits, and the taxonomy tests case studies are the living proof of that. But how to comply with the regulation, to be applicable in 2021? All AM hope that the market leaders will provide their solutions well before the regulatory deadline—But, considering their ESG scoring approaches, and data… good luck with that.
Eventually, the results: in a word… divergent. It seems easy to get a percentage of the eligible funds depending on the sectors—since the taxonomy defines which sectors are eligible—, but when it comes to the calculation of the compliance score with the taxonomy… well, “surprise”: one AM says less than 5%, others 20%, some other “a majority of the funds” without even providing a percentage… In brief, a nightmare—especially considering that the EU didn’t define any compliance threshold to reach.
we definitively see here that the traditional ESG rating approach hit its limits, and the taxonomy tests case studies are the living proof.
To date, the institutional or retail investors will not be able to understand anything about the taxonomy compliance, and neither who will be controlling the compliance, nor will they be able to discriminate between truly sustainable funds, and others. A taxonomy compliance percentage doesn’t mean nothing, per se: it needs to be explained, justified.
The EU taxonomy is a great project, and it’s absolutely required for the good progress of Sustainable Finance. But the road ahead will be quite long, and for the EU taxonomy to be useful, the final objective must not be lost in the process: empowering and enlightening the sustainable investors, allowing them to understand how much sustainable a fund truly is, in order to make responsible investment choices, based on trustful information— pedagogy and responsibility being shared between the companies, the AM, and the end investors.
The “Positive Impact” thinking has been making the buzz for a while now, but the approach is often mixed up with the more restrictive notion of “Positive Social Impact”, or limited to the direct impact linked to a company “Business Model”, and, by doing so, it misses 90% of a company impact—and, incidentally, of a Positive Impact portfolio composed of “Positive Impact” companies.
The UNEP-FI Principles for Positive Impact Finance indeed define “Positive Impact Business & Finance as that which serves to deliver a positive contribution to one or more of the three pillars of sustainable development (economic, environmental and social), once any potential negative impacts to any of the pillars have been duly identified and mitigated.”
An Iceberg Model of Positive ESG Impact
The iceberg metaphor is well known, and self-explicit: 90% of the iceberg is not visible, being immersed below the waterline.
The same applies to the concept of Positive Impact. Most of the Positive Impact portfolios approaches or Positive Impact startups focus on the identification and quantification of the direct outcome of their business model impact: e.g. improving the health of the customer, reducing social inequalities, improving social inclusion or diversity, etc.
This kind outcome is of course very desirable and positive, and its more directly visible. But it’s the top of the iceberg, visible above the waterline.
Impact, below the waterline
By focusing on the direct business model outcome, the risk is to overlook the overall ESG impact (Environment, Social, Governance), linked to any company’s operations—let’s call it the Corporate Impact—, and particularly to the specific Key ESG Impact topics related to the sector of activity: the Sectoral Impact.
For instance, the Retail and Apparel industry is well known to have strong issues related to water pollution or child labor.
You might say that this is covered by the traditional CSR processes and reporting, by CSR certifications, or by the traditional SRI analysis. The problem with the SRI analysis approach is that it is well known by professional to be poorly relevant, subjective—an “aggregate confusion”, according to the MIT Sloan Sustainability Initiative.
Regarding common (and sometimes trendy) CSR certifications (e.g. EcoVadis, B-Corp, etc.), they are usually based on self-assessment with a strong bias toward the checking of intentions, policies, and signature of initiatives (PRI, PSI, etc.) more than the real outcomes. Recently, a paper indeed questioned the link between a supposed intention, and the concrete ESG performance delivered. Focused on the PRI commitment of Asset Managers, the study concluded that “overall, only a small number of funds improve ESG while many others use the PRI status to attract capital without making notable changes to ESG”.
A good and transparent CSR disclosure process and reporting will provide us with the ESG data required, which is indeed available through different Data Brokers (with, unfortunately, heterogeneous coverages and qualities), after data entry. But to be able to leverage these ESG data, they need, according to us, to be handled appropriately:
Quantitative ESG indicator selection: The relevant quantitative ESG indicators to assess need to be carefully selected, among the thousands ESG indicators more or less relevant available on the market. The objective is to be able to evaluate the quantitative outcome—i.e. impact—on the ESG topics. Among others, the coverage of each indicator needs to be taken into account as selection criteria, in order to allow ranking and comparison between peers.
ESG Impact scoring: The ESG indicators need to be scored to evaluate the positiveness of the impact, based on quantitative metrics, and specific impact thresholds. As exemplified here above, we must now move beyond intention-checking (such as ESG initiative commitment, or existing corporate policies) to measure the sustainable and positive impact of a company, or investment portfolio, and “do not harm” is one of the guiding principles for the implementation of Impact Scoring.
Conclusion: don’t overlook impact below the waterline!
Positive impact is not restricted to the sole outcome of a company’s business model, and thus needs to be assessed at the global level of a company’s operations, i.e. on the three, and still relevant, dimensions of Environment, Social, and Governance—and, in case you didn’t notice, that’s precisely why we launched IMPACTIN: Sustainable impact, measured. That’s our motto.
ESG Engagement is not limited to Proxy Voting policy!
Are you a responsible investor willing to influence the ESG performance of a company you invested in ? Then “Engagement” is probably one of the tools you are using to try to achieve this end.
But the fact is that, today, Engagement has little or no impact on companies’ ESG performance. In most of the cases, the so-called “Engagement” is unfortunately limited to the definition of the Proxy voting policy of the professional investor for the shareholders General Meeting. This is so true that the communication of Asset Managers in their Engagement Reports usually only provides, as key indicators, the respective percentage of votes: FOR, AGAINST, ABSTAIN…
By the way, and as an example, according to a study published by Majority Action in 2019, the 25 largest Asset Managers, during the 2019 general meeting of the Energy and Utilities sector, didn’t systematically vote for the climate resolutions…
Anyway, voting against a company resolution is not truly engaging with a company on its ESG performance: It’s too late. A responsible investor should engage early with companies in its portfolio, in order to have a chance to really influence the policies and operations of companies—for the benefit of us all.
Better Engage on ESG performance, through impact
To go beyond Proxy Voting policies will require to start a true Engagement process through a mid/long-term discussion between interested parties, and build on trust.
And, as a Responsible Investor, looking at the ESG impact performance can offer you several, and non-exclusive, approaches to improve your engagement process—and here is some of them.
1. Identify ESG weaknesses and strengths
Identify a company’s ESG weaknesses and strengths, using ESG impact areas rating, and then target your engagement effort around ESG impact themes: Gender Equality ? Energy consumption ? Tax evasion ? etc.
2. Track ESG progress and trends
Using the historical part of the available ESG impact ratings of a company, track its progress on the several ESG topics of interest identified. Does the ratio of hazardous waste increased ? The proportion of women in management decrease ? These kind of signals can trigger your discussion with the company, based on facts.
3. Benchmark the ESG performance amongst peers
Benchmarking the position of the company ESG impact performance, relatively to its peers within sub-industries, geographies, and other relevant dimensions, will provide you with interesting insights. You could then focus, for instance, your Engagement process on the companies with the greater room for improvement, or foster thematic Engagement on specific developping countries—depending on your Engagement objectives, and Core Values.
4. Converge on quantitative performance indicators
During the discussion phase with a company, within the engagement process, you will be able to propose, discuss, and engage with the company on the improvement of quantitative and positive impact indicators — e.g. percentage of women in management, percentage of renewable in the energy mix, etc.—i.e. you will be able to track facts, and not intentions.
An Engagement process, obvisouly, takes time. But, ultimately, if the engagement fails, after several cycles, and the company doesn’t demonstrate its willingness to improve its ESG performance—based on quantitifed results—, then, as a Responsible Investor, you should take responsibility for your investment, and also for your end-customer—which might have selected you for your strong ESG values—, and thus divest, from the company, probably progressively, in order to demonstrate your convictions, and allow the company to alter its negative ESG strategy during the process.
ESG Engagement: a responsible investor’s duty
At IMPACTIN, we think that the current situation regarding Engagement—focused on poorly efficient Proxy Voting policy—is not a fatality, and that another approach is possible.
The ESG impact ratings, available today, empower the Responsible Investors, and provide them with the right tools to better select the more relevant companies in their portfolio, and truly engage on the improvement of specific, quantitative, measurable indicators of positive impact.
As Responsible Investors, you have the power to redirect the investment flows to have a real positive impact on our planet and society. Money, through finance, is a great lever, maybe the greater of all—and remember Archimedes’ saying : “Give me a lever long enough and a place to stand and I will move the earth“. The transition towards a more suistanable economy thus lies in your hands.
Within the coming two years, several regulations on Sustainable Finance will come into effect, which will directly affect the Asset Management, Insurance, and Pension Funds activities. All of those evolutions are emerging from the overall “EU Green Deal” context, and from EU working groups on Sustainable Finance and Sustainable Insurance.
In March 2021, the EU regulation on sustainability‐related disclosures (known as the “Disclosure Regulation”) will become applicable. The regulation will require financial market participants and advisers to provide investors with pre-contractual ESG-related information linked to specific financial products. The objective is to allow investors to make their investment decisions also on the basis of ESG insights.
Finally, the EU Taxonomy for Sustainable Finance will come into effect in Jan. 2022: this regulation aims to introduce an EU-wide classification system for ESG-related investments. Now adopted by the European Council, the agenda aims to establish the taxonomy by the end of 2020, with full application by the end of 2021.
A first good point, is that all the initiatives aim at measuring and reporting the environmental and climate impact, in order to contribute to tackle the Climate Change issues. The second good point, is that the objective is wider and not restricted to the environment: all ESG impacts will need to be explained, and reported—the target is the measurement of the overall “sustainable performance”, in order empower the end investors in their investment decisions.
We cannot agree more this mission statement, underlying the regulation—and this will also address the current transparency issue. The challenge investors are now facing is the way to evaluate the ESG impact of their investments. The current ESG rating approaches available on the market cannot provide an evaluation of the impact, and instead offer “an aggregate confusion“, usually anchored in intention- or policy-checking, and subjectivity…
But another approach is possible—and it must rely on quantitative ESG data analysis for a factual positive or negative impact evaluation.
Will investors be ready ? The recent joint letter from the financial investment industry seems to indicate the contrary. But if we don’t yet have the definitive answer to this last question, on our side, we already planned, and developped ESG impact rating solutions to help investors comply, be transparent, and credible.
Are you an Asset Manager or an investor wanting to understand the real impact of your fixed income or equity portfolio ? Or maybe do you want to measure the physical risk and mitigation or transition impact of your Real Estate portfolio ? Do you need to measure the alignment of your portfolio vis-à-vis the 17 SDGs ?
Then the whole IMPACTIN team is pleased to announce the launch of our Portfolio ESG Impact & Climate Change Scorecard to you. We designed this scorecard to provide both the positive or negative ESG impact of a portfolio through several dimensions, and provides physical risk, climate mitigation and adaptation scores.
The following ESG performance scores are provided for any scored portfolio, with their associated trends:
ESG impact rating scores (x4);
ESG Smart Areas scores (x11): Infrastructure, Building, Education, etc.
SDG alignment scores (x18);
5P scores (x6) — where 5P stands for Planet, People, Prosperity, Peace, and Partnership;
It allows both to benchmark a portfolio vis-à-vis market indexes and funds, to promote your fund impact performances respectively to other competitors, and clearly disclose your funds ESG impact to your end customers.
Please contact us for detailled information, discussion and samples!
Climate Change Mitigation means the reduction or prevention of the emissions linked to human activities, such as, e.g., CO2 and GHG, or fluorinated gases (F-gases), whereas the Climate Change Adaption regards actions to adapt to the impacts of climate change, already happening: flooding, droughts, sea level rise, wild fires, rainfall patterns alteration, etc.
Climate change is already happening […] This leads to many adverse impacts on ecosystems, economic sectors, and human health and well-being. Therefore, actions to adapt to the impacts of climate change are paramount and should be tailored to the specific circumstances in different parts of Europe
— European Environment Agency
This dataset provides 14 climate change and physical risk scores and trends for 1554 territories, i.e. countries, regions or cities, for a total of 21,756 data points. The following numbers of territories are covered:
600+ cities (urban areas).
The scores and data included in the dataset provide the following information, for each territory featured:
Territory general information: code, name, country, population, geographical coordinates, etc.;
Climate Change score;
Climate Change Mitigation score;
Climate Change Adaptation score;
Physical Risks score: exposure to natural hazards such as flood, droughs, tsunami, etc.;
Climate Change Transition score;
Rank in territory group (countries, regions, cities);
218 countries featured — i.e. 20% to 65% more countries than market competitors
87% of ISO Countries covered
100% of larger sovereign bonds emitters covered
7 Geographical Regions 100% covered
4 Income Groups 100% covered
20,928 indicators (scores and trends)
ESG impact scores vs. ESG risk scores
Indicators-based vs. criteria-based
Quantitative, objective, and repeatable approach vs. qualitative and subjective rating
Quarterly updates vs. Yearly
218Country ESG Impact profiles featured in a report
Pre-filtered geographical regions and income groups ratings, and associated geographical maps.
The case for an ESG impact rating of countries
After decades of experience in the field of extra-financial evaluation, CSR, SRI and Sustainable Finance in general, we were not satisfied with the solutions available on the market: we found there too much subjectivity, a heterogeneous quality in the ratings, a too long duration between the updates, a risk-based approach not aligned with the necessity to track and demonstrate the real impact of an investment, etc.
Investing for sustainability impact is the new frontier for responsible investment, with a stronger focus on how investment decisions have real world impact on ESG factors over financial materiality
— PRI CEO, Fiona Reynolds, Dec. 2019
For the here above reasons, we decided to craft our own approach: after months of research and development we ended with our proprietary methodologies of ESG Impact rating, for countries, territories and cities, listed companies, and investment portfolios: IMPACTIN was born, with the vision that Impact Investment is the next step for Sustainable Finance, and that high-quality Impact ratings are required to fuel the development of the growing Impact Investment landscape.
The IMPACTIN Countries ESG Impact Rating dataset solution is one of our ESG Impact Rating dataset solutions, providing 48 impact scores and their trends for 218 countries, allowing to individualize the impact of countries through many dimensions: Smart Infrastructures, Smart Health, Prosperity, Climate Change Transition, contribution to the 17 SDGs, etc.
We have several other data products on their way, which will be released in the coming weeks — stay tuned!
Tech For Good France is the French network of entrepreneurs and investors involved in the delopment and financing of technological and digital solutions fostering the transition towards a more sustainable and responsible society.
We are delighted to announce that our application to join the network has recently been accepted, and that IMPACTIN is thus now an official member of the association! and we take the opportunity to thank the members of the board for that.
Since our ESG Impact rating approach is rooted in Sustainable and Responsible Finance expertise, leveraged thanks to Data and Digital technologies, it seemed natural to become part of a network of doers and investors sharing the same interests.
Let’s hope that in the aftermath of the Covid pandemics, we will collectively choose to deflect the course of our society towards Sustainability, and Sustainable Finance more particularly — and the Tech For Good, i.e. the positive and responsible use of technology for the society and the environment, can probably be a key to unlock this future.
We are eager to meet the members, and start to network, and get feedback, for the greater good! Stay tuned!
In spite of the difficult situation the world has been facing these last weeks, we had the recent opportunity to be selected to participate, early March, to the Grand Finale of the startup acceleration program “Les Ambitieuses” Tech For Good, organized by La Ruche.
The program is dedicated to impact startups, with at least a women cofounder, a tech-based solution, and a proof of market.
This allowed two of us to participate to a very interesting and well organized 2-days long training, the 10 and 11 of March, with all the other finalists selected among 90 candidates — a Bootcamp — in order to network, challenge our value proposal, to discover or reiterate with some entreneurships tools, and finally to be train to become “Serial Pitcher“!
Unfortunately, this time, we have not been selected as one the 8 winners of the award— but this experience allowed us to attend a 2 days-long training very relevant for us, to challenge our business plan, to better prepare our investor pitch and deck, and, above all, to become part of a network of wonderful women, all committed to be build a better world, throught their impact businesses. And for this, we thanks all the very professionnal and skilled people of La Ruche for the quality of the bootcamp program.
Congratulations to all of the participants, girls, you are amazing!
According to the Novethic indicator, published last week, the offer of sustainable funds is massively growing in France, combined with an always more demanding retail market. This situation is not unique in Europe: the same trends are reflected in the national markets of countries such as Italy, Spain, or the United Kingdom, etc. The trends and market data are furthermore indisputable: in 1 year, between Dec. 2018 and Dec. 2019, the number of sustainable funds has grown from 438 to 704, and AUM have almost doubled, from €149bn to €278bn.
There is indeed a very strong momentum for Sustainable Finance, and especially for Thematic Funds, representing a quarter of the offer, but with a greater collection ratio (45%) compared with non-thematic sustainable funds.
So far, so good, we might say, but, but, unfortunately, quantity is not a synonym for quality. Behind the scene, for most of all these “so-called” sustainable funds, the situation is far from brilliant, when the ESG criteria’s quality is investigated… with a transparency almost lacking.
The french “Label ISR” (SRI Label) as so far been granted to 263 funds, among other certified funds with a national label. This kind of label is supposed to be the first step on the way towards a greater transparency, but it is still, today, not sufficient to be fully trusted, and here is why: the Label ISR only ensures that a selection process exists, and that it integrates ESG criteria. The rest is left a the discretion of the fund manager: how the process is applied, what are the thresholds, etc. For instance, a Label ISR fund doesn’t need to be 100% ESG-compliant. No opinion is provided by the certification authority on the companies composing the funds, or the quality of the method used, the existence of positive or negative impact metrics or score… And regarding the non-labelized sustainable funds, the situation is even worst and more obscure… with sometimes only a slight “greening” for some new or existing funds…
These are some of the reasons why the EU Taxonomy, and the future EU Label, are more than welcome. Let’s hope they will both help to provide more transparency in sustainable finance, and foster a truly sustainable investment approach. The risk faced, once again, is the generalization of greenwashing to gain market shares, which will end in the disillusion of the retail investor and strip the sustainable finance market of its whole credibility…
Until then, quantity will continue to prevail over quality, as a sign of the times.
As the poet said, nothing is more powerful than an idea whose time has come. And the two last weeks probably demonstrated that the time for ESG criteria integration into country rating might have come…
Last week, we attended the One Planet Sovereign Wealth Funds initiative reception, being held in Paris, at the Shangri-La hotel, and co-organized by Bloomberg. Since 2017, the SWFs have been working to accelerate efforts to integrate financial risks and opportunities related to climate change in the management of sovereign funds and large assets. Their moto: “Integrating Climate Change Risks and Investing in the Smooth Transition to a Low Emissions Economy“. Bloomberg, through GBF, the Bloomberg Global Business Forum, is also committed to improve social and economic wellbeing in the coming decades. During the dinner, were 200 people from different countries gathered, discussions focused on the climate change urgency, and the need to take action, with no further delay.
Nothing is more powerful than an idea whose time has come.
Several approaches of countries ESG rating, and worldwide ranking, are currently available on the market, mostly based on hundreds of qualitative and quantitative data. They are very similar, and share the same limitations: they do not systematically try to measure the ESG impact of a country, and agregate too many indicators, ending with a non-sensical ratings and rankings, which, e.g. benchmark highly developed countries together with emerging ones… and dilute the score of the rated country.
And then, there is the United Nation SDG initiative, which also provide, for its high-level 17 Sustainable Development Goals (SDG), a list of hundreds indicators, updated on a yearly basis, with a heterogenous coverage depending of the country. The UN SDG evaluation ends with surprising results. For instance, the Goal #1, “No Poverty”, can be considered, according to the UN, as achieved both by France and Italy, with a respective score of 99.5% and 97.5% reached regarding extreme poverty… which is obviously not the case when, according to Eurostats, there is respectively 17.1% of the French and 28.9% of the Italian population at risk of poverty and social exclusion…
Traditional financial rating agencies, such as Fitch, S&P, etc., have tried to integrate the ESG rating in the country credit rating, with quite mitigated results… For others, the ESG rating should remain independent, or is not considered that much important, excepted for the G, the Governance part… the overall situation is unclear, and thus the research goes on. How to make sense of all that fuzz ? Indicators are indeed trustable (when of quality), but their interpretation depends on their nature, context, threshold…
According to us, a meaningful ESG rating and ranking is not only possible, but also absolutely essential and necessary. Only ESG criteria can allow us, today, to really discriminate between countries: not to recognize this point means promoting the financial indicators supremacy, and its disconnection from reality, with the deadly societal and environmental consequences in the long term, that we are now all well aware of…
With countries bonds representing representing more than half the AUM of financial investments, worldwide, the question of the integration of a reliable ESG rating into the credit rating balance must be raised, and answered—urgently.
$1,000bn: this is the forecasted size of the Green Bond market by 2021, according to HSBC. And Green Bonds are not only issued by corporations, but, increasingly, by countries, territories, or cities. It gives an idea of the importance to tackle this issue, and to provide as soon as possible a way to reliably evaluate the ESG performance and impact of Green Bonds, which means first having this reliable ESG impact rating for countries, cities, and territories. The credibility of those instruments is here at stackes.
That’s why during the last months, we had been researching, and working on ESG Impact rating methodologies, and ended with our own proprietary methodology for countries, which provide an ESG Impact rating, covering 6 ESG areas, a Transition Rating, and a SDG compliance rating, for each country. Our unique approach is to combine our sound human expertise in the field of CSR, ESG, and SRI, with a limited set of meaningful, smart indicators. IMPACTIN countries rating allow us to truly discriminate the respective performance of countries regarding ESG stakes, and to track a nation progress along its social and environmental transition.
Measuring and tracking progress, like a mantra, getting insights and adjusting the journey accordingly to the ESG goals: this path towards a more sustainable society requires meaningful, and smart ESG Impact indicators and scoring, at the country, city, corporation, or investment portfolio levels. And that’s why we provide all four of them.
The end of a year—or the beginning of a new one—is generally a propitious period for the (healthy) exercise of the retrospective. So, let’s look back at 2019, and try to foresee what’s coming in 2020, in the domain of sustainable finance, and sustainability in general.
In March 2018, the EU published its “Action Plan of Sustainable Finance” — a shorter name for the officially called “Commission action plan on financing sustainable growth“. In 2019 not only the EU process accelerated, but many events also took place, in the sustainable world:
The ESG finance achieved 30 trillions of dollars of AUM in the world—this is indeed a very exciting momentum for Sustainable finance. This sustainable finance market is now very quickly developing, and this happens at a worldwide scale;
A worldwide mobilization of the youngest generations, captained by Greta Thunberg, which is fostering the contest wave of populations against the climate policy of their respective governments;
The global consciousness raising of the public opinion on Sustainable developmentmatters, with people now understanding that the widely accepted economic model is not sustainable, and calling for a change, along with the coming of a new kind of consumer, and citizen, wanting to decide for their life, and also to positively and actively contribute, by their choices, to the society’s changes;
In June, the EU agreed to develop low carbon benchmarks, a taxonomy of sustainable economy activities, and higher disclosure requirements of corporate sustainability;
With such a global context, the risk is greatly increasing for companies, and for the countries, to be the target of legal procedures, initiated by citizens or NGOs. No doubt that the coming years will see this kind of legal case proliferating—and both companies or countries signatory of any convention (PRI, etc.), or with any moral obligation disclosed (code of conduct, sustainable guidelines, etc.) should worry about the effective respect of their own—publicly or privately taken—engagements…
Sustainability cannot be reduced to the sole climate change issues. A sustainable society must not only transition toward a zero emissions objective, but it must also endeavor to suppress all forms of discrimination, corruption, and provide social justice, among other ESG goals.
To achieve this broader view of a sustainable finance, beyond the short term urgency of Climate Change issue, which must be now tackled with no delay, several profound evolutions in the approach of capital investment will be required:
Capital flows must be reoriented towards a more sustainable economy.Transparency and long termism must be fostered in financial economy activity–The EU made indeed an excellent work considering that the current gap between the real economy, and a sustainable economy, is still a very huge one. For instance, customers’ expectations are becoming stronger and stronger vis-à-vis sustainable issues, but little has been achieved so far to fill this gap. The financial market needs so to listen to the “voice of the customer” and adapt the economical choices in this direction. To date, this is really not the case, and the investments are still not sufficient, and with no clear objectives…
Financial risks, and ESG impact linked to environmental and social activities, must be (better) measured. The EU is asking to foster the integration of the ESG in the credit research, and all financial and extra-financial research activities are thus concerned. To this end, the development of a common methodology, to be widely accepted by all the market, would probably be needed. Today, many approaches for the analysis of ESG topics are existing, but not for all the different classes of assets, and they are often very difficult to understand. A lot of work will be required to harmonize, and to create the solutions… Innovation will be fundamental to achieve this goal. The EU opened the path with the taxonomy, but all the work still needs to be done. Green bonds and SRI funds are strongly growing, but a reality-check of the real impact of these investment instruments need to be created. For instance, take the Green Bonds market, where the intensity of the “Green” for each project is very questionable, and different… we will also probably need the creation of a European commission to verify the accuracy of the granting of these labels… To make the sustainable market more transparent, hence credible, is absolutely essential to win the confidence of the customers.
Clear and measurable ESG goals must be defined and monitored in the companies or investments project, or in the investment funds. The end objective should be to measure the sustainable impact of the investments on the society, i.e. the creation of a sustainable value. To this end, such kind of KPIs should be integrated in the boards’ goals, in the grants, etc.
2020 should be a year of very hard work for people in finance, and the challenge is very high: to transform a purely ROI-oriented finance into a sustainable finance, to minimize—as much as is still possible—the effects of the climate change, and achieve a resilient economy. True conviction, and transparency are unescapable to avoid falling in the traps of sustainability/greenwashing… And to make this possible, the top management of the Finance sector must lead the way.
In June 2019, this year, 2,832 funds proclaimed to use ESG criteria, of which 168 have been created during the 1st semester of 2019.
Thematic funds were notably started by Pictet Asset Management in the 2000’s—with their first fund focused on water. Today, this kind of investements represents for Pictet AM EUR 40bn AUM, declined on different themes. Over the past 20 years, 10 new themes have been created: Timber, Smartcity, Nutrition, Security, Biotech, Digital, etc.
Their scope ? Listed companies. Their targeted customer segments ? Retail, Insurance, Asset Managers, Pension funds, Banks…
Thematic ESG impact funds have today their own momentum. Why is it so ? Because a theme gives investement a purpose, easy to grasp for the investor. And because ESG issues are the very core of our today’s concerns. And although thematic investing had been around for 20 years now, it only represents a mere14% of the USD 28tn ESG AUM—there is still a very huge potential for growth.
We can thus expect ESG Indexes to gain also more and more traction in the passive asset management sector.
But Thematic ESG funds also come with limitations. Their biggest current problem is probably that—paradoxically—thematic ESG funds doesn’t systematicaly integrate ESG criteria… It means that, despite the fact that the theme of a fund can be, e.g., a Social or Environmental topic, the companies or states listed in the fund could nevertheless either be involved in ESG controversies, or can have a very poor ESG rating.
Here, no doubt that transparency, and thus credibility, will be a key—to avoid the greenwashing / impactwashing drift. And, when they exist, ESG Labels could also help—even if they can certainly be improved… The EU is indeed working on sustainable finance labels, and also promote a greater transparency on the existing ESG indexes.
To overtake these current limitations, and become more massively adopted by the market, we think that Thematic ESG funds should thus:
Propose innovative themes, taking into account macro-economic trends;
Systematically integrate ESG criteria, in the companies and countries selection process;
Measure and report the ESG impact of the fund, on the environment and the society, i.e. its capability to deliver a real value for our human societies.
That’s why, to help our customers to achieve these goals, we created our own Thematic ESG Impact Funds Library, with 30+ innovative funds concepts, and our own proprietary ESG Impact rating framework. Interested ? Let’s start the discussion.
The 2019 French Mayors and Local Authorities Fair (Salon des Maires et des Collectivités Locales 2019) was held from the 19 to the 21 November in Paris, Porte de Versailles. We visited the exhibition, and if one trend has to be recognized, it is the following: “Energy and Ecology Transition”.
This trend, aligned with the fair global theme—Sustainable Cities and Territories, 2030 Horizon—, is indeed the sign of a main stake for the French cities, in 2019, and certainly beyond. The Smart Territory project of the Angers Loire Métropole (ALM), won by a consortium leaded by ENGIE, and attributed the week before the fair, is probably emblematic of this trend: the declared main objective of ALM is to “accelerate the ecological transition of the territory” in order to allow “important energy savings “, by leveraging a city hypervision platform. In summary, A more sustainable territory, thanks to a smart city platform connected to smart urban infrastructures.
The domain of energy and ecological transition is of course now at the very core of the cities’ strategy due the climate change emergency—tragically demonstrated once again a week ago by the deadly extreme weather event that occured in the South-East of France. This domain is absolutely essential, but, from our point, it should not be the sole concern here, when it comes to cities and territories sustainability.
From a broader ESG impact perspective, we have thus developped our own proprietary Cities and Territory Impact Rating solution, which comprehend 11 impact domains. Amonst them, the ones currently raising attention, Energy and Environement, can be found, along with the territory “Connectivity” dimension (Communication, Smart Infrastructures , etc.), but also other domains we consider essential to measure the ESG Impact of a territory : Education, Governance, Security, or Healthcare, for instance.
It must be remembered that urban areas, according to the OCDE, will concentrate, by 2050, almost 70% of the wolrdwide population, whereas only 34% of this popluation was living there in 1960. The future of mankind lies indeed in the very hands of cities, which, today, concentrate also the main pollution sources and the zones the most at risk, but they also constitutes, with their billions of to-be eco-citizens, probably our best leverage to accelerate the sustainable transition of human societey—and certainly our only hope.
How are Insurance companies integrating ESG in their core business? To start with, let’s have a look at the most impacting domains. Obsiously, two activities are mostly concerned with ESG aspects, and Climate Change issues. On the first hand, we find the Investments activities, since the insurance business is an investment-intensive activity, and any insurer thus invests the money of its customers. On the second hand, one of the mostly concerned activity is the underwriting—which concerns all things related to the insurance contracts and policies, both for the individual, or for the corporate customer.
The insurers—or, at the very least, the biggest of them—have been integrating, for years now, the ESG criteria into their investments… in a more or less serious way. But the real core of the insurance business is not the investement per se, and the asset management activity is indeed usually operated within a separate branch. Their existing approaches are unfortunately generaly very far from providing real anwsers, to real-world problems.
For whom the bell tolls
Climate Change, for instance, is not only a real-world stake, and insurers are not only one of its main actors, but, more problematically for them, one of its most (indirectly) concerned “victims”: the consequences of Climate Change have indeed a strong impact on the frequency and intensity of extreme weather events (sea level rise, flood, storms, etc.), with an increasing financial impact on the insurers finance, and their reinsurers: Year after year, the situation greatly exceed all the forecasts, both in term of weather or budget…
With the expected aggravation and unpredicatability of these natural disasters, in a maybe not-so-distant tomorrow, could hence insurers be put on default ? The modern role of an insurer should indeed not only to pay—when it’s too late (i.e. after the occurence of a risk)—but, more important, its role should be to prevent, or reduce, as much as it is possible, the occurence of the risks… a principle which is maybe currently too much out of sight within the insurance business—when it comes to the ESG stakes.
When I’m speaking of more or less serious approach to the integration of ESG topics in the insurance business, I’m particularly questionning the idea of, e.g., integrating ESG criteria, whereas at the same time continuing to invest in enviromentally or socially detrimental activities, such as fossils fuels, dangerous pesticides, etc.
As a modern investor, do I indeed really want my capital to be invested in activities currently compromissing the future of mankind, if not of the whole planet ? My own future, and the future of my children ?
—It tolls for thee
We are all in the same boat—a ship of fools… Thus, today, it must be first stated, to the insurers’ investment companies truly wanting to progress in the right direction, that exclusion policies are no longer enough—especially when the results are not publicly disclosed, and are thus, silently, regressing, instead of progressing. And, in 2050, it will be too late to take action, considering the current environmental impact of human activities, and the CO2 emissions released into the atmosphere.
No man is an island entire of itself; every man is a piece of the continent, a part of the main; if a clod be washed away by the sea, Europe is the less, as well as if a promontory were, as well as any manner of thy friends or of thine own were; any man’s death diminishes me, because I am involved in mankind. And therefore never send to know for whom the bell tolls; it tolls for thee.
— John Donne, Meditation XVII, Devotions upon Emergent Occasions, 1624 (translated from Early Modern English)
But where to start ? For instance, a Carbon Footprint of all investments instruments could be disclosed—to date, very few investors disclose such information—along with a true Energy Transition strategy. Here again, we could count the insurance companies on the fingers of one hand… Even worst, in the underwritting domain, everything still needs to be done, in order to integrate the ESG criteria into the insurance underwritting process.
The UNEP FI PSI initiative, Principles for Sustainable Insurance, is laudable, but so far it brings no, or little, solution on the table. It’s nevertheless a must-read, and inspiring source for the insurance top-management, and one which sets the moonshot for the whole industry.
Sustainable insurance is a strategic approach where all activities in the insurance value chain, including interactions with stakeholders, are done in a responsible and forward-looking way by identifying, assessing, managing and monitoring risks and opportunities associated with environmental, social and governance issues. Sustainable insurance aims to reduce risk, develop innovative solutions, improve business performance, and contribute to environmental, social and economic sustainability.
A maybe sharpest approach is the one proposed by the EU through its taxonomy for sustainable activities, published in June 2019. The document underlines the role of Insurance as a key sector in the economy transition and climate mitigation. It thus demand to the whole sector to assume its full responsibility in the integration of ESG criteria into its core business. The work produced by the EU is of a great quality, and rooted in strong convictions. Let’s hope it will help foster the transition toward a more sustainable world.
But will these requests of the EU and UN be followed by concrete actions from the industry ? The answer lies in the hands of the insurance sector. The context is nevertheless clear enough—those who want to survive and still be there in 2050 need to take action. Now. But the insurers need to be commited to integrate ESG risks into insurance underwritting not only because their customers, or shareholders require it, but because their financial future—and our own future—depends on it. It’s a question of survival, which needs to be fully understood, and integrated on a daily basis, by the top management, and the whole management. Then things could be set, eventually, in movement, and positive impact delivered, possibly very quickly.
Integrating the ESG riks in the insurance underwritting is, indeed possible. It requires, mostly, a commitment to achieve this goal, and the right approach. That’s why, at Impactin, we have developped our own insurtech solution allowing to score the ESG risks of an insurance contract, to measure the ESG impact of a corporate insuree’s activity, and even to accompany the corporate insurance customer into its positive impact journey, and ecological transition—for the greater good.
Yes, all of this is possible, there are no excuses any longer in the Insurance sector—and our mission here is to help you achieve your own sustainable goals! Let’s get started.
After having spent in Singapore our first week of our activity, for our very first contract, we can tell that Singapore is certainly not a random destination when it comes to Sustainable Finance.
The City-State is indeed the 5th market in this domain in Asia (excl. Japan), with a share of 11%, after Malaysia, Hong-Kong, South-Korea, and China. The Fintech landscape is also very active, with a strong commitment of the Regulator to develop this domain—and, in effect, Singapore Fintech Festival SFF x SWITCH, is starting today for 5 days of financial innovation (11-15 Nov.).
Furthermore, the whole Asia Pacific region has become the world’s growth pole, with 40% of the global GDP in 2018—but is also contributing to 48% of the world’s total CO2 emissions, and is exceptionally exposed to climate change impacts: sea level rise, extreme weather, high temperatures, etc.
In this context, it is thus really worth noticing that Asia’s share (excl. Japan) only accounted for 0.2% of the global sustainably managed assets in 2016 (ie. USD 52bn vs. USD 23tn), i.e. for 0.8% of the Asian assets (excl. Japan), with a predominance of Sharia funds, representing a third.
Asia is thus a region with both serious ESG challenges, and with an incredible potential for transformation—and we, at IMPACTIN, hope to be contributing on it in the coming months!