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All that glitters is not Green

Are you greenwashing by overstating the ESG impact of your funds ? And maybe, in the process, did you fire your not-so-cooperative Sustainability Officer ?

Then, probably, and after DWS—suspected by US authorities—, the regulator is coming for you.

The Wall Street journal reported last week that the U.S. authorities are investigating DWS Group. The asset manager of the Deutsche Bank, is suspected of having overstated the ESG performance of its sustainable investments, following information and documents disclosed by Desiree Fixler, a fired executive. The news leads to -14% for DWS on August the 26th.

The WSJ considers this US authorities’ investigation an “important first step in crackdown on ethical-investing claims“, but the DWS case is the very tree that hides the forest…

Soon after, the release of a report from InfluenceMap draw the attention to several other financial US and EU actors, including BlackRock, UBS, State Street, and Mediobanca, notably. The think tank, which screened 723 ESG and climate-related equity funds with over $ 330 bn AUM, demonstrates that nearly 70%, are actually inconsistent… i.e. the vast majority!

But, for an ESG insider, there is nothing new here—and this is what was expected to happen. Indeed, last January, in a previous article—An ESG bubble on the rise?—we hightlighted the fact that, without controls from an authority and due to a lack of standardization, among others, self-proclaimed ESG funds are easy to market, and sell, thanks to high levels of demand…

Fighting greenwashing is precisely one of the main objectives of a regulatory initiative such as the EU Taxonomy (cf. our article: Taxonomy vs. Greenwashing: 14 key takeaways on EU webinars). After the summer break, we are all back to work: a great occasion for the AMs to eventually start to truly look at the real ESG impact of their Sustainable Funds, maybe with the help of real experts in the field, in order to comply with the regulations, and meet the ESG end-investors’ expectations…

Otherwise, remember that, in the end, the Regulatory Boogeyman is coming for you, too…

References

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Photo by mahdis mousavi on Unsplash

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Are IMPACTIN ESG Impact Rating solutions on your radar?

Well… if it is not already the case, we will be there soon: we are delighted to announce that we are now listed in Radar, the new RegTech and RiskTech Marketplace developped by RegTech Associates.

More details on our ESG solutions and product information should be available soon, stay tuned!

Credit: Photo by Andrés Dallimonti on Unsplash

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KICKSTART 2021: IMPACTIN enters the Final Selection round!

We are thrilled to announce that we will be participating in the KICKSTART Final Selection pitching session, among 27 other startups from 10 countries!

KICKSTART is an ecosystem innovation platform—and one of the largest European of this kind. It bridges the gap between startups, corporations, cities, foundations and universities to accelerate partnerships and deep tech innovation.

Thanks to our ESG IMPACT TOOLKIT, we are competing in the FinTech & InsurTech Focus Area, which might lead to collaboration opportunities and POC in the following domains, the more interesting for us:

  • InsurTech
  • FinTech & Banking
  • Platform Solutions 
  • SMEs
  • LegalTech
  • RegTech

We are thus keeping our fingers crossed, while looking forward to collaborating on innovative use cases! Stay tuned!

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Even more regulations on Sustainable Finance

On April 21st, 2021, the EU adopted a new package of regulatory measures concerning Sustainable Finance. We outlined hereafter the main characteristics of these initiatives :

  1. The EU Taxonomy climate delegate act. To be adopted by the end of May, 2021. After revision, green economic activities eligible to the taxonomy have been defined.  The EU has finalized the EU taxonomy criteria for two of the six objectives (mitigation and adaptation).  Main changes and controversial subjects concerning the exclusion in the case of agriculture sector, natural gas, and nuclear energy—for these two sectors the discussion, very political, of course, will be postponed in the second half of 2021. The coverage represents 40% of listed companies in Europe. Date of application: January 2022. It now up to everyone to find the solutions on the market to comply with this regulation.
  2. A proposal for a Corporate Sustainable Reporting directive (CSRD), to enforce the comparability of corporate sustainability reporting. The date of application is mid-2022. Main strengths of the document:
    • it foresees the adoption of regulated common standard;
    • the scope is extended to 50,000 companies;
    • it imposes a mandatory external audit of the report;
    • it is complementarity to taxonomy and to the key concept of Do Not Significant Harm (DNSH), that asks to measure the impact of ESG activity.  
  3. Six amending delegated acts to fiduciary duties, investments and insurance. It is probably the main regulatory progress provided by the package because it asks to the advisory, insurance and investments, to integrate ESG in their activities vis à vis of the clients. Quite an enormous challenge, considering that, currently, the market is not able to answer to the market needs in terms of transparency of the SRI tools or funds used, or due to the lack of instruments including this—especially in for insurance and credit.

All these evolutions go in the right direction: toward the standardization of Sustainable Finance, and they should help foster the comparability regarding the investments’ impacts. Once again, it’s worth noticing that control authorities and control processes must be defined and implemented too, to protect the end-investors and to prevent greenwashing—regulations without control would be meaningless.

On our side, our ESG Impact toolkit allows us to easily adapt to this evolutive regulatory context, and to propose to Asset Managers ad-hoc solutions, among other needs, for EU Taxonomy and CSDR compliance: ESG Impact datasets; Impact rating methodologies (ESG Impact, Climate Change, Physical Risk / Materiality); Key ESG risks mapping for 158 sub-industries; Impact Performance scorecards.

Credit: Photo by Guillaume Périgois on Unsplash

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Join IMPACT CONNECT digital event on April 23rd for a matchmaking with IMPACTIN

Are you a sustainability manager, impact or venture capital investor, or interested in finding innovative solutions for Sustainable Finance or Regulatory Technology? Then you should freely register and join us for the IMPACT CONNECT | Matchmaking Day event on April 23rd, afternoon, with other GreenTech / Impact start-ups.

The IMPACT CONNECT | Matchmaking Day is a fully digital event organized by the IMPACT FESTIVAL, an initiative aiming at connecting Green start-ups and transforming corporates & impact investors.

Don’t wait! The event is limited to 500 participants!

Agenda

IMPACT CONNECT – Matchmaking Day 

Friday, 23.04.2021, digital matchmaking event

14.00 – 15.00 Keynotes 

15.00 – 18.00 Networking & Matchmaking

15.00 – 16.00 Impact Challenge – Team Pitches

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5 key points of France’s pioneering position in impact finance

Last Thursday, March 25, 2021, was held an event that—hopefully—inaugurates the positioning of France as a pioneer in scaling Impact Finance.

Entitled “Impact finance: fad or fundamental trend of sustainable finance?“, the event brought together around Bruno Le Maire—the French Minister of Economy, Finance and Recovery—leading players in this topic of major importance for the future of sustainable finance: Olivia Gregoire (Vice-President of the Finance Committee) and Thierry Déau (CEO of MERIDIAM).

Important announcements have been made, including, in particular, the following 5 key points, taken from the press release:

To address these topics, a dedicated working group, which will operate under the supervision of Finance For Tomorrow, was launched during this event.

  1. “Making Paris the world’s leading financial centre for impact finance”;
  2. Proposing a common definition of impact finance;
  3. Defining methodologies for measuring impact;
  4. Developing recommendations to ensure France’s leadership in sustainable finance and impact finance;
  5. Promoting existing expertise in the Paris financial center.

An initiative to closely monitor in 2021

This event strengthens our conviction that we were on the right track when, mid-2019, we oriented IMPACTIN, our FinTech/RegTech, on the measurement of the ESG impact of all types of issuers (countries, territories, cities, companies) and investments (portfolios, funds, indices), and also, in the choice of Paris as the headquarters of our company, now envisioned by the French government as the future central hub for impact finance.

Yes, it is essential to develop impact finance, and as a result to extend and generalize the concept of impact beyond its most frequent meaning, centered, today, on market niches: companies whose business model is built on the pursuit of a direct social or environmental impact.

It is with this idea in mind that we developed, at IMPACTIN, quantitative methodologies for measuring and rating the ESG impact ,applicable to both listed companies (or any company) or to bond issuers such as countries, regions or cities, in order to be eventually able to rate investment portfolios, funds or indices.

The government’s initiative is therefore to be closely monitored in 2021, and, in the meantime, as a French and Paris FinTech/RegTech, specializing in measuring and reporting the ESG impact of sustainable investments since 2019, we hope to be able to contribute in the coming months to discussions on these topics of general interest for the development of impact finance!

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Les 5 points clés du positionnement de la France en pionnier de la finance à impact

Jeudi dernier, le 25 mars 2021, s’est tenu un évènement qui inaugure, espérons-le, le positionnement de la France comme pionnier du passage à l’échelle de la Finance à Impact. En effet, l’évènement « La finance à impact : effet de mode ou tendance de fond de la finance durable ? » regroupait à Bercy autour du ministre Français de l’Economie, des Finances et de la relance, Bruno Le Maire, des acteurs de premier plan de ce sujet d’importance majeure pour l’avenir de la finance durable : Olivia Gregoire (Vice-présidente de la commission des finances) et Thierry Déau (CEO de MERIDIAM).

D’importantes annonces ont été faites, dont, à retenir plus particulièrement, les 5 points clés suivants, issus du compte-rendu :

  1. « Faire de Paris le premier centre financier mondial de la finance à impact » ;
  2. Proposer une définition commune de la finance à impact ;
  3. Définir des méthodologies de mesure de l’impact ;
  4. Élaborer des recommandations en vue de garantir le leadership de la France en matière de finance durable et de finance à impact ;
  5. Promouvoir l’expertise existante au niveau de la Place de Paris.

Pour instruire ces sujets, un groupe de travail dédié, sous l’égide de Finance For Tomorrow, à été constitué et lancé à l’occasion de cet évènement.

Une initiative à suivre de près en 2021

Cet évènement nous conforte doublement : d’une part dans le choix d’orienter dès sa création, mi-2019, notre FinTech, IMPACTIN, dans la mesure de l’impact ESG de tout type d’émetteurs (pays, territoires, villes, entreprises) et des investissements (portefeuilles, fonds, indices), et d’autre part dans le choix de Paris comme siège de notre entreprise, envisagée par le gouvernement comme le futur pôle mondial de la finance à impact.

Oui, il est bien indispensable de développer la finance à impact, et en conséquence d’étendre et généraliser la notion d’impact au delà de son acception la plus fréquente, centrée sur les niches que constituent les entreprise à impact social ou celles à impact environnemental, c’est à dire des entreprises dont le modèle d’affaire vise directement à générer un impact positif du point de vue social ou environnemental.

C’est dans cette perspective que nous avons développé, chez IMPACTIN, des méthodologies de mesure et de notation quantitative d’impact ESG applicables que ce soit aux entreprises cotées (ou à toute entreprise) ou aux émetteurs obligataires que sont les territoires : pays, régions ou villes, afin de pouvoir noter les portefeuilles d’investissements, fonds ou indices.

L’initiative du gouvernement sera donc à suivre de près d’ici fin 2021, et, dans l’intervalle, en tant que FinTech/RegTech française et parisienne, spécialisée dans la mesure et le reporting de l’impact ESG des investissement durables depuis 2019, nous espérons pouvoir contribuer dans les prochains mois aux discussions sur ces sujets d’intérêt général pour le développement à l’échelle de la finance à impact!

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IMPACTIN ESG datasets available on Datarade.ai

We are very pleased to announce that our ESG datasets are now available on the Datarade.ai online data platform, our new data distribution channel!

The following three datasets are already described:

More datasets, solutions and services will be integrated in the coming weeks, stay tuned!

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ESG Impact, through Real Estate management

The impact of Real Estate

Building constructions and operations accounted in 2019 for 35% of the world’s energy consumption, and also accounted for nearly 38% of energy-related CO2 emissions, worldwide…

For these reasons, the UN estimated that, in order to limit the rise in global temperatures to less than 2 degrees by 2030, the Real Estate sector must reduce the average energy intensity of buildings by at least 30%.

Obviously, greener buildings that reduce the consumption of natural resources can help to reduce this footprint. Furthermore, new technologies might also come to the rescue, by optimizing the consumption of energy and water, whereas, at the same time, contributing to enhance the quality of life of occupants—if built, by design, on the top Green IT systems.

Progress is fundamental not only for new buildings, but also for the existing park, since more than 70% of all the buildings in the world is composed of buildings 20 years old and older.

SDG and the EU Green Deal: 2 levers for change

To foster the transition toward a greener Real Estate management, regulations and initiatives have emerged, asking for a reduction of its environemental impact. At the international level, the UN SDGs were a first lever for greening the Real Estate sector, and for the development of smart cities and smart territories. The UNEP FI indeed also created a dedicated working group on Responsible Property Investment.

At the European level, the greening of existing buildings is an area of great interest for the EU’s ambitions to achieve climate neutrality by 2050. The Commission, targeting a wave of renovation, has announced a €250bn investment plan linked to deep refurbishment and energy-efficiency related reforms, in all member States. These efforts should help achieve the EU’s target of reducing GHG emissions from buildings by at least 55% by 2030.

Impact Real Estate on the rise

On the social dimension, the European Commission and ELTI estimated to €140bn the yearly shortage in social infrastructure spending in Europe, especially in Social Housing, Health Care, Long-Term Care. In this global context where our societies face social and environmental challenges, Impact Real Estate has been firmly growing, in the recent years.

Impact Real Estate, as a type of impact investing, aims at combining Real Estate management with the pursuit of specific social and environmental outcomes, for instance:

  • social housing;
  • affordable housing;
  • energy efficiency;
  • improved access to urban infrastructure;
  • urban regeneration;
  • etc.

The interest for this topic is growing, and, for instance, a dedicated impact investing subgroup has been created some years ago within the ESG Committee of INREV, the European Association for Investors in Non-Listed Real Estate Vehicles.

Towards a measure of Real Estate ESG impact

Can Impact Real Estate can move even further forward, beyond impact investing funds ? We believe so. We believe indeed that it is possible to go beyond social or environmental impact investing, which targets very interesting, but also very specific ESG outcomes, towards a global ESG impact investing, taking into account the whole ESG impacts of the Real Estate management industry. But how ? Several opportunities can be leveraged:

  • First, the identification of the relevants ESG impact indicators for the Real Management industry and related activities (Construction, etc.)
  • Then, the measurement and tracking of the ESG performance of these ESG impact indicators, i.e. by measuring the ESG positive impact on the local communities;
  • Taking into account the Physical Risk linked to the climate change—which obviously is strongly geography-dependent;
  • Report the SDGs contribution and ESG impact for the Real Estate funds;
  • Engage with emitters to enhance their ESG perfomance on specific key ESG topics.

It can seem a long way to go, but accelerators exist, along the way. On our side we provide several datasets and other solutions that can be leveraged: ESG Impact ratings, Climate Change ratings, and Physicial Risk ratings for countries, regions, and cities (and also companies); Key ESG Risk Topics for 158 sub-industries (including 12 Real Estate sub-industries); Scorecards: SDGs Alignement, ESG Impact, Climate Change, etc.; Thematic ESG Funds concepts (Smart Territories, Smart Healthcare, etc.)…

Finance is probably the greater lever we have to tackle the social and environmental issues our socities are facing—and Real Estate management is probably one the key financial sector to act upon, in this race against the clock.

References

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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

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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)