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Taxonomy vs. Greenwashing: 14 key takeaways on EU webinars

Did you miss last week the 2-days of webinars on the EU Taxonomy for Green Finance organized by the European Commission the 24 and 26 of February ? Don’t let it bother you: we prepared 14 key takeaways!

Webinars on EU Taxonomy: Agenda

With the 800 printed pages of EU taxonomy, 1 kg. of pop-corn, and 2 litres of organic coffee to help digest the whole, we were quite ready to confront the 9 hours of 1.5 to 2 hours-long presentations of series of webinars on EU Taxonomy, aiming at discussing future developments with the Platform on Sustainable Finance—and whose program was the following:

Wednesday 24 Feb.

  • Enabling transition finance
  • Developing potential taxonomies beyond green activities
  • Data and corporate reporting

Friday 26 Feb.

  • The process of developing taxonomy criteria for the remaining four environmental objectives
  • Social taxonomy – how might it look

14 key takeaways on the EU Taxonomy webinars

We organized our takeaways by keywords in the following table, each keyword being a topic discussed during the webinars. Each takeaway provides a brief overview of both the EU experts’ point of view and of our opinion on the topic.

KeywordDiscussed issueTakeaway
Experts’ point of view and our opinion
1. ToolWhat is the taxonomy, and what it is not?The taxonomy is a dictionary that allows to clarify the activities that are good for the climate change transition.
Our opinion: absolutely necessary — but it must be exhaustive, precise and comprehensible
2. BenchmarkWhat does the taxonomy allow to compare?The primary objective is to compare between them companies, and also funds.
Our opinion: many aspects require further clarification, in the Technical Annex, especially regarding the metrics, thresholds, definitions…
3. Significant HarmThe definition of this principle if not clear enough.Agreed—The Platform recognized that this aspect needs additional work to detail the principle. The definition can vary depending on the nature of the activity.
Our opinion: a clear definition will certainly be key, associated with thresholds related to the type of impact—and that is precisely how we handled this in our own proprietary ESG Impact rating methodology.
4. TransparencyIs it the best tool to fight greenwashing?One of the main goals of the taxonomy is precisely to fight greenwashing.
Our opinion: a mandatory tool in a strongly growing market, where greenwashing thrives….
5. GreenWhy a “green” taxonomy, and not a “sustainable” one?Climate Change is a priority, and it is complicated enough to reach a consensus on it with all stakeholders involved.
Our opinion: we totally understand and agree, let’s start where it is easier, and the future aspects of the taxonomy should allow to truly measure the sustainability of a company.
6. Time problemBut will the taxonomy really be applicable? And when?The taxonomy will become applicable in less than a year, but it doesn’t mean that it will be “perfect” at this date.
Our opinion: sure, not everything needs to be perfect to start to truly act. But to be efficient, 3rd-parties verification will be required.
The social and environmental situations are urgent, we must now act without further delay.
7. Taxonomy enlargementShould the taxonomy be extended to other sectors?This is a highly political question, that impeded the publication of the final version of the Technical Annex.
Our opinion: the most important part of the work on the taxonomy was probably the choices having been made—and it takes courage for this kind of choices. Yes, some activities are not, and cannot become sustainable, ever. It implies that concerned companies will have to pivot their activity toward a sustainable one.
8. ReportingWhat should be the format of the reporting?Reporting is essential, and it represents an opportunity to rethink a company’s strategy. The taxonomy reporting could substitute for the—generally—fat and barely digestible sustainable reports.
Our opinion: it is indeed necessary to work on this aspect, another key, in order to make everything accessible to the general public—and fight against greenwashing.
9. DataHow to solve the problem with the data? To date, much information required by the taxonomy is missing on the data providers’ service offer. A project of European data platform is under scrutiny. Data must be harmonized.
Our opinion: great project idea, this European data platform (we have been waiting for something like this for decades…), but the data is not all… complementary information must be provided in order to be able to analyze the data, e.g. impact thresholds need to be defined, from adverse to positive, for a company or fund—and to be able, also, to track the progress.
10. Improvement pathIs taxonomy applicable to all?Today, the taxonomy can induce difficulties for certain companies, especially SMEs and SMIs, where CAPEX and OPEX tracking and reporting is not the rule.
Our opinion: this is an important problem, since the objective of the taxonomy is to become a foundation for the green deal, and the funding and lending—for the years to come.
11. CoverageHow does taxonomy apply to non- European companies?Taxonomy is applicable to EU companies
Our opinion: Yes, but obviously we should go further for companies that sell in Europe, and especially for the funds—and copy, e.g., the approach of the NFRD. We must not forget that there are other countries that are also working on their own taxonomy.
12. Missing issuersThe taxonomy applies to companies, but how to handle the other kind of issuers of a fund? (countries, territories…)The taxonomy focused on companies, to date.
Our opinion: an important point—to date, a large part of the investments concerns the Govies, the Green Bonds market is booking, and the ESG risk of a company’s country is essential to measure, especially for an investment fund. An that’s also why, at IMPACTIN, we developped several datasets such as our Countries ESG Impact Rating dataset or our Territories Climate Change and Physical Risk Rating
13. TransitionWill there be a transition period in the application of taxonomy?Yes, a transition period will allow things to be put in place.
Our opinion: We agree, not everything needs to be perfect to start to truly act. But to be efficient, 3rd-parties verification will be required. The social and environmental situations are urgent, we must now act without further delay.
14. PrioritiesWhat are the priorities?Today, the priority is to reach a consensus on the final text of the Technical Annex and recommendations, which will be ready in the second half of the year
Our opinion: no doubt there is still a lot of things to do, a great many things—and priorities must thus to be clarified and communicated clearly, especially due to the tight timing.

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ESG rebranding, ESG debranding, and the SFDR

Will we reach a turning point in ESG investments, when, within 24 days, on March, the 10th, most of the Sustainable Finance Disclosure Regulation (SFDR) obligations will become applicable?

The current situation has indeed become quite paradoxical in the biggest market, Europe, representing 70% of the worldwide sustainable AuM : never before had ESG funds attracted so many investments, now worth $1.7tn, worldwide.

From ESG rebranding…

Why paradoxical ? Due to two phenomena. First, the growth of ESG funds has been accompanied by an increasing “repurposing” of non-ESG funds into ESG ones, in Europe, and sometimes thanks to simple rebranding lacking true responsible investment strategy. For instance, a recent article from the Financial Times exposes that, among others signs of greenwashing, some of the largest ESG funds, hold stocks of the largest carbon emitters companies…

…to ESG debranding

Second, due to the incoming sustainable finance regulations, and especially the SFDR disclosures, we now see previously ESG-branded fund being, timely, debranded… probably in order to avoid the more restrictive sustainable impact reporting obligations linked to ESG, green, or sustainable investment funds.

But ESG debranding will not clear the AM from all sustainable SFDR disclosures: the article 6 still applies— it will only clear them from the more restrictive sustainable disclosures imposed by the SFDR, e.g. in the articles 8 and 9.

ESG DEBRANDING WILL NOT CLEAR THE ASSET MANAGERS FROM ALL SUSTAINABLE SFDR DISCLOSURES—ONLY FROM THE MORE RESTRICTIVE.

It is worth noticing that the SFDR is indeed not limited to sustainable investments: all investors will need to explain how they manage the sustainable risks in their investment process, and also to explain why it is not relevant, if it is the case. Financial products with sustainable investment as objective have even more reporting obligations within the SFDR framework.

After a record year of collection for ESG funds during 2020, will we then see in 2021 a massive ESG debranding of… the same ESG funds ? Predictions are hard, especially about the future. But an option exists, and it is for Asset Managers to transform the regulatory obligation into an opportunity, by providing the end-investors with the clear and relevant ESG impact metrics they expect, in order to understand their own investor impact—and not being misled by “vanity” ESG metrics.

References

Credit

Photo by Markus Spiske on Unsplash

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ECB stress tests on environmental and climate change risks: supervisory expectations, and enablers

A week ago, during a Sustainable Finance Deep Dive on ESG Data Reporting & Banking Compliance, organized by TechQuartier, we had the opportunity to present our views and ESG Impact solutions to a panel of major German banks and financial institutions. Beyond ESG Data, the workshop emphasis was on the incoming ECB Stress Tests related to Environmental and Climate Change risks, which are planned in 2022.

ECB Stress Tests

In November 2020, the European Central Bank (ECB) indeed published a non-binding Guide on climate-related and environmental risks, providing clear supervisory expectations relating to risk management and disclosure. The ECB identified environmental and climate-related risks as a key risk driver for the euro area banking system and expect thus institutions to take a “strategic, forward-looking and comprehensive approach” to considering these risks, and to understand their impact on the business environment in which they operate, in the short, medium and long term.

Consequently, the ECB expects financial institutions operating in the euro zone to start performing self-assessment on the supervisory expectations in early 2021, whereas supervisory stress tests of climate-related risks will be performed by the ECB in 2022.

Banks or financial institutions should thus be able to measure the exposure of their different kind of activities to environmental and climate-related risks. Then key metrics must be published and reported, for regulatory and disclosure purpose.

Two main risk drivers are considered by the ECB, regarding the climate-related and environmental risks:

  1. Physical risk — refering to the financial impact of climate change,
  2. Transition risk — refering to the potential financial loss resulting, directly or indirectly, from the transition towards a lower-carbon and more environmentally sustainable economy.

All the supervisory expectations linked to the disclosure of the climate-related and environmental risks are then listed in the detail in the ECB’s guide. We summarized these 13 supervisory expectations in the table here below.

List of the 13 high-level supervisory expectations regarding disclosure on climate-related and environmental risks. Source: © European Central Bank, 2020—Guide on climate-related and environmental risks, Supervisory expectations relating to risk management and disclosure, November 2020.

Are financial institution prepared ?

The very same month, in November 2020, the ECB also released the results of an assessessment perfomed on 125 institutions. This assessment demonstrated that only 3% of the financial instutions studied were disclosing all the expected basic climate-related information, and 39% were disclosing less than half of this information. A situation confirmed by a study from UBS Group AG, exposing that European banks are unprepared to disclose their exposure to climate change and other ESG issues, as reported by Bloomberg.

The ECB report on institutions’ climate-related and environmental risk disclosures showed that only 3% of the 125 financial instutions studied were disclosing all the expected basic climate-related information

Enablers and solutions for the ECB Stress Tests

The ECB expectations are pushing the financial institutions in the good direction, but the required level of Environmental and Climate-related risks assessment and reporting is indeed quite high, vis-à-vis the current situation: the gap is huge for the banks. But enablers exists, to be able to meet these ECB expectations—such as our Investors Solutions.

On the following table, and for the 1st expectation on the Business Environment, we listed many of our solutions which can be leveraged in the environmental and climate-related risk assessment and reporting process for the banking activities.

Expectation 1 : “Institutions are expected to understand the impact of climate-related and environmental risks on the business environment in which they operate, in the short, medium and long term, in order to be able to make informed strategic and business decisions.

IMPACTIN enablers and solution for the ECB Stress Tests on climate-related and environmental risks

For instance our Sectoral ESG Risks Mapping solution provides a list of the main Environmental risks (plus Social and Governance risks) for 158 sub-industries. This mapping can thus be used to assess the exposure to specific Environmental and Climate-related risks depending of the exposure in specific sub-industries.

We also provide both Climate Change and Physical Risk rating datasets (for countries, territories, and companies) and SDG, ESG Impact, and Climate-Change and Physical Risk scorecards, which can both be used to assess the materiality of risk linked to the investment portfolios (geographies, nature of activities). As example, our Climate-Change Climate-Change and Physical Risk scorecard, displayed in the following figure, provides, for a sepcific Fixed Income fund:

  • the Physical Risk exposure of the fund to Cyclones, Drought, Flood, Tsunami, and Earthquake;
  • The Energy Mix related to the fund (shares of Fossil fuels, Nuclear, Coal, Renewable);
  • Climate Change and Physical Risk scores: Climate-Change score, Mitigation Score, Adaptation score, Physical risk score, Transition score.
  • The Climate Change and Physical Risk scores for every issuer in the portfolio,
  • etc.
IMPACTIN Climate Change and Physical Risk Rating Scorecard

Conclusion

Are the financial institution ready to meet the supervisory expectations of the ECB Stress Tests on climate-related and environmental risks ? Probably not. Some hard work is required to meet the required quality and level of transparency of information disclosure and reporting expected by the ECB, but the good news is that solutions exist to help—and we are proud to be part of them!

References

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An ESG bubble on the rise?

The ESG finance has shown many signs of very strong market traction since the beginning of the year. And now, questions start to pop-up… “Is ESG overbought? Is it in bubble territory? “—these two relevant questions were asked as a reaction to the interesting publication of key investment themes by the Deutsche Bank Weath Management (centered on ESG). Several others have indeed been questioning the current ESG investment growth, sometimes assimilating ESG to another fad and market bubble, or pointing the role of greenwashing behind this suden rise.

So, let’s have a closer look at the situation.

A temporary fad?

Is ESG another fad? We really don’t think so: Sustainable Finance didn’t emerge last year. It has long been here, and is rooted, among others, in the pursuit of ethical investments by North-American religious congregations at the end of the 19th century. In 2018, Sustainable Finance (SRI) already represented $12 trillion AUM in the USA only.

Considering ESG investment a fad is thus being myopic, short-sighted. ESG is more like a tidal wave: a 30 centimeters-high wave in the open ocean, a century ago, and now becoming 30 meters high when approaching the shore.

Overbought? More probably “overexpected”…

Is it overbought ? Probably not: there is a strong demand, from both institutional and Retail investors, but there is clearly a risk of overexpectation: to date, the current ESG rating approaches and ESG funds selection processes cannot allow the AMs to provide neither the end investors with products matching their high-level of ESG impact expectations, nor the regulators with the required regulatory reporting of impact.

So, there will be an increasing risk to disappoint the end-investors regarding the ESG performance, when they will ask to know what is the real impact of their investments. Regarding the financial return, ESG funds have mostly indeed outperformed, and consequently attracting more financial flows, but when it comes to Sustainable Investments, the main expected return should be the ESG performance.

ESG bubble ? Greenwashing might led to it

Increasing levels of greenwashing might indeed artificially inflate an ESG bubble. Due to the lack of standardization, and control, self-proclaimed Green funds are easy to market, and sell, thank to high levels of demand, such as currently on Green Bonds.

At the same time, little information is provided on the impact performance, and being a signatory of, e.g., the PRI, is quite often good-enough to be considered a responsible investor—unfortunately, good-intention are not enough, and it has now been demonstrated that, e.g., PRI-signatories AMs do not improve their ESG performance

As money is poured into questionable “Responsible Investments”, the risk of greenwashing and artifical bubble is growing, along with the expectations… There is still time to adjust: yes, measuring the true impact might be hard, but it is not only possible, it is mandatory. Sustainable Finance and its credibitlity are at stake.

Credit: Photo by Raspopova Marina on Unsplash

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Is ESG Impact measurable?

A very recently pusbished HBR article, entitled “ESG Impact Is Hard to Measure — But It’s Not Impossible“, discusses the difficulty of measuring ESG impact. In the conclusions, it’s author, Jennifer Howard-Grenville, proposes three complementary concrete actions in order to go beyond the measure—which, today, might indeed be misleading due the aggregate confusion brought by most of the ESG ratings available: “Why ESG ratings vary so widely (and what you can do about it)” ask indeed the MIT Sloan.

ESG Rating is broken…

Yes, ESG Rating is broken, and this situation is nothing new: for instance, January the 20th, 2004, i.e. 17 years ago, the relevancy of ESG ratings was already questionned in a then famous article: “The Rashomon Effect: Why Do Innovest and Oekom Rate Toyota’s Environmental Performance So Differently?“, published on socialfunds.com by William Baue.

17 years from Baue’s article publication, this so-called Rashomon Effect is still prevalent among the ESG Rating approaches available on the market.

Of course, we cannot agree more on the idea that ESG is indeed measurable—we launched IMPACTIN with the very purpose in my mind to provide a concrete solution to the 6 main issues we see today in the market approaches to ESG Rating:

  • ESG Risk-based methodologies, lost in intention-checking;
  • Subjectivity, due to a human-based analysis;
  • Qualitative approaches;
  • Rating dilution, often aggregating hundreds of indicators;
  • Black-box rating methodologies, usually non-repeatable;
  • Long update cycles (sometimes > 24 months), due to a limited agency’s analysts workforce vs. thousands of emitters to analyse;

How to fix it ?

At IMPACTIN, we approached the problem the other way around, and built natively our quantitative ESG impact rating methodologies on the following principles:

  • ESG Impact scoring approach, based on a small set of relevant ESG impact indicators;
  • Objectivity, due to a our quantitative and automated approach;
  • Quantitative approach;
  • Key ESG indicators (SMART Data), quantitative and selected for their relevancy, coverage, quality, etc.;
  • Repeatable and deterministic method;
  • Frequent and automated updates , thanks to our quantitative approach and our automated data-analysis pipeline.

Our ESG Impact rating can thus be used by AMs in their Sustainable Finance activities (thematic funds creation, portfolios and indices Impact Rating, scorecards, reporting…), and to improve the Engagement process with emitters, but also for the emitters to track their own ESG Impact performance through dedicated dashboards.

Yes, “what gets measured gets managed“, and we think there’s still plenty of room for better ESG measurements, through ESG Impact scoring. And that’s the precisely the solutions we provide to the Sustainable Finance market.

Credit: Photo by Ivan Vranić on Unsplash

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IMPACTIN: a Top LegalTech in France, 2021

We had the pleasure of having been listed by Welp Magazine among 26 French Top LegalTech companies worth a follow in 2021. We thank Welp Magazine for the recognition !

We are used to say that we stand at the crossroad of several x-Tech: FinTech, RegTech (or LegalTech), InsurTech, and SustainTech:

And much more is to come in 2021!

Credit: Illustration by Freepik Storyset

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IMPACTIN listed in Best Database Startups Worth A Follow In 2021

We are pleased to annouce that IMPACTIN was nominated as one of the Best Database Startups Worth A Follow In 2021 by The Startup Pill! Thank you for the support!

We empower investors with solutions to measure the impact of their investments, and to comply with sustainable finance regulations.

The full list features 73 worldwide startups, selected for their approach to innovating inside of the Database industry, on the basis of:

  • Innovation: ideas, Go-to-Market, product;
  • Growth: exceptional growth or growth strategy;
  • Management;
  • Societal impact.

The growing trend of the ESG / Sustainable Finance market will indeed be accelerating in 2021 according to market research, and, at IMPACTIN, we do our best to follow the trend and provide our customers with cutting edge impact investing solutions, to support the market growth and ambitions—Stay tuned!

Credit: Dark Orange pills image © 2021 by Startupill (Owned by Fupping Ltd)

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IMPACTIN selected for Les Ambitieuses Tech For Good Grand Finale 3rd edition

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!

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The reign of ESG funds quantity, and the signs of the times

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.

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Bloomberg, One Planet SWF Paris, and the rise of ESG integration to country risk

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.

— Victor Hugo

The very same week, the day before the reception, Monday the 28th, Euler Hermes became the first credit insurer to add ESG criteria to country risk methodology, according to Ludovic Subran, Chief Economist at Allianz. Of course, we couldn’t agree more with this rising market trend, since, during the second semester of 2019, we had been researching this topic, and ended with our own proprietary methodology. Our ESG Impact Rating for countries was the thus the first product we developped, and released, last November. And, indeed, January the 19th, we published our own view on the subject: “Countries ESG impact rating: should it be integrated into credit rating?“.

Well… time is on our side, yes it is!

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Countries ESG impact rating: should it be integrated into credit rating?

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.

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Sustainability in finance, and beyond—a look back at 2019, and perspectives for 2020

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:

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.

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Thematic funds or indexes, and ESG integration—a market trend on the rise?

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 mere 14% 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.

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Sustainable trends from the French Mayors and Local Authorities Fair (SMCL) 2019

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.

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ESG and insurance underwriting: everything still needs to be done

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.

This way to conduct an insurance business is surely a short-sighted one… and one for which insurers, their shareolders, and eventually, the insurees, will pay a high premium, in the long run… included also in term of reputation! And shareholders are, let’s say the word, accomplice of this situation—since researches have demonstrated that ~95% of the resolutions are positively voted during Annual General Meetings—despite the increasing concern of the whole society regarding the ESG stakes, and especially of the youngest generation.

Researches have demonstrated that ~95% of the resolutions are positively voted during Annual General Meetings—despite the increasing concern of the whole society regarding the ESG stakes.

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.

The UNEP FI Principles for Sustainable Insurance

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.

The “EU taxonomy for sustainable activities” underlines the role of Insurance as a key sector in the economy transition and climate mitigation.

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.

References

Taxonomies: DBS and EU approaches

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.

DBS IBG Sustainable & Transition Finance Framework & Taxonomy

At this point, we can question if a different and more sustainable finance is truly possible… That’s when we found DBS taxonomy initiative. The Singaporean bank developed and released in June 2020 a taxonomy of sustainable and transition economic activities.

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.

Singapore financial skyline, by night

SESA 2020: South Europe Startup Awards ceremony announced

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.

See you online, Dec. the 16th, for the SESA 2020 Grand Finale! And, yes, you will also need to create your own Virbela avatar!

IMPACTIN joins TechQuartier FinTech community!

We are thrilled to announce that we joined TechQuartier‘s leading FinTech community, following our participation in the recent Female FinTech Competition 2020. TechQuartier is based in the heart of Frankfurt am Main, in Germany.

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.

In the wake of the Brexit, a recent Bundesbank’s study also confirmed banks’ preference for Germany as a base for operations away from London. The assets to be relocated in the country have been estimated to total €675bn . Frankfurt, already a major hub for Financial Services both in Germany and in Europe, is already attracting many financial institutions in the Brexit aftermath.

Joining the vibrant TechQuartier FinTech ecosystem of startups, investors, technology partners and others will no doubt be a great opportunity for IMPACTIN to find strategic partners or investors.

Let’s conclude with a quote from the cosmopolitan and European thinker, writer and poet, born in Frankfurt:

What can you do, or dream you can , begin it,

Boldness has genius, power and magic in it.

Johann Wolfgang von Goethe, Faust, Prelude at the theatre

Reférences:

Credit: Photo by Mathias Konrath on Unsplash