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:
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.
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.
Takeaway Experts’ point of view and our opinion
What 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
What 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 Harm
The 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 bekey, 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.
Is 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….
Why 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 problem
But 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 enlargement
Should 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.
What 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.
How 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 path
Is 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.
How 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 issuers
The 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
Will 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.
What 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.
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.
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:
Physical risk — refering to the financial impact of climate change,
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.
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 ourInvestors 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.“
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.
The Climate Change and Physical Risk scores for every issuer in the portfolio,
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!
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…
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-basedmethodologies, lost in intention-checking;
Subjectivity, due to a human-based analysis;
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;
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.
InsurTech: ESG Risk underwriting is a solution we offer to the Insurance Market, with ESG Impact scoring and Physical Risk assessments;
SustainTech: we provide a unique ESG impact rating solution, allowing toscore the sustainable ESG impact of a company, a territory (city or region), a country, or a financial index / investment portfolio.
Among the 2020 initiatives worth noticing in Sustainable Finance, DBS bank engagement deserves a closer look. DBS is a Singaporean bank, regularly awarded, and one the biggest bank in Asia, outside China. Last June, the bank published its own taxonomy for sustainable and transition finance, which defines sectors considered as sustainable activities.
The DBS initiative was released the same month as the EU taxonomy for sustainable activities, whose official publication took place after several years of development, and which will come into effect in June 2021 in Europe. Technical appendices of the EU Taxonomy had been modified last November regarding the list of sectors, after a 4-weeks long concertation, and are expected to ben published very soon.
We propose hereafter a brief overview of both initiatives, not to judge which is the “best”, but in order to understand how these entities tried to solve the problem of defining a taxonomy for the ESG investments, in their respective contexts.
EU taxonomy for sustainable activities
We already discussed the EU taxonomy several times these last months. Its first merit is, simply, to exist. But all the limits that we evoked, are still present: lack of a defined threshold to define a sustainable fund, lack of precisions, and many questionable criteria, whose purpose is to indicate, depending of a sector, if a fund is sustainable, or not. The worst thing is that, to date, neither sanctions nor controls of how the taxonomy will be applied are defined… Clearly, every AM will do what it wants.
And, de facto, it’s already happening: cf. our article providing 3 key takeaways on AMs’ first taxonomy tests published by the PRI. This trend will, obviously, goes on, since, in matter of so-called sustainable or green funds, greenwashing is now the rule—especially in a market context where the Sustainable Fund share showed a steady and strong growth in 2020, despite—or probably, thanks to—the COVID-19 pandemics, and where the retail market is looking for impactful investments, aligned with its increasing environmental and social concerns.
As example, in France, a boom happened with the SRI labeled funds (“Label ISR”), with now 618 of them, including many ETFs. This label was a tentative to provide a guarantee of sustainability for a fund. Patently, nothing is more wrong—many of the labeled funds having Carbon intensive or controversial activities in their investments… and the label doesn’t provide any kind of a measure of the ESG impact… But how can “SRI labeled” funds be invested in non-responsible companies, one may ask? Simply because the label doesn’t require this to be granted. Almost all you need is a policy, i.e. a “good” intention, a home-made ESG strategy more or less restrictive depending on the AM. There is no obligation to provide a quantification of the positive impact for an investment to be granted with the “SRI Label”…
So, once more, a useless intention check, and eventually, as usual, a disappointed customer—thanks to a label whose objective was initially to foster the Sustainable Finance, and not to obfuscate even more the situation, and to contribute to the ambient greenwashing.
A first and very important point, is that a bank asked itself the good questions, and didn’t waited for an imposed regulation to address these issues but acted on it by itself.
The bank taxonomy provides us with a list of sectors, specifying for each if it is eligible to a green or transition label, or related to an SDG objective. And the result is… quite good! What is even better, was to start with the purpose in mind, with the target objective: the point of this taxonomy is to help end customers understanding if a fund is composed of sectors of activities having, or not, a positive impact on the three aspects: green, transition, SDGs. DBS then provides us with a list of existing initiatives which might help to check the sustainability of a company or a project.
The approach might seem a bit simplistic, at first, especially when the 20 pages of the DBS taxonomy is compared to the 100+ pages of the EU Taxonomy and its 593 pages of Technical Annex—but it definitively not the case, because the objective pursued is very clear: providing a “label” for the funds, and be transparent with the customer regarding its investment. Also, interesting to notice, is the fact that the bank has for objective to use this framework for every financial transaction, and so that it implies its use for real-world project funding, grants, etc.
Can a bank be considered sustainable with only 5% of its funds being managed according to SRI principle? Certainly not, obviously… and the last point is here to give the promise that everything will be controlled by an external, independent audit. Of course. Because if nobody is controlling or verifying such an initiative, it will have no credibility, indeed…
It is thus very reassuring to see an initiative such as DBS’s one emerging, despite the many difficulties inherent to the financial sector, and even more, to see it coming from a region, Asia (Japan exc.), there the SRI market is still underdeveloped respectively to the Western financial markets (EU, USA).
As the Asian market is now indeed becoming the driving engine of the worldwide economy, it is here demonstrating a strong will and vision, which will surely allow it to catch up with the (supposedly) more advanced markets, and maybe to quickly surpass them. The future will tell.
We will thus be impatiently looking forward to seeing if DBS will deliver on its promises and ambitions and will also have the courage to be fully transparent on the negative aspects, and the probable difficulties to be encountered along the path.
Providing truly positive ESG impact funds for the Sustainable Finance is not an easy task, and it requires difficult choices for an Asset Manager, among which divestments from rogue companies that no one wants to make due to their (strictly) financial ROI, a necessary transparency, which can put the bank in a delicate position—but, in the end, it is the only choice to create a truly positive economy.