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

Celebrating one year of impact!

What a year… 12 months ago, we launched IMPACTIN with the mission of providing investors with a concrete measure of the ESG impact of their investment portfolios—and we did it!

After a first customer in Singapore, we continuously took feedback from the market and from our business leads in order to challenge our business vision, methodology, and impact products. This allow us, after some pivots, to identify the proper market needs, and regulatory opportunities, and we validated the feasibility of a quantitative impact scoring approach based on Smart ESG Data.

Our products portfolio now includes both impact scoring datasets and impact scorecards. Our impact scoring datasets, already available on DAWEX, cover the following emitters:

These impact score datasets allowed us to develop several on-demand impact scorecards:

Along the path, we also participated in the jury of the South Europe Startup Awards (SESA), and we had the pleasure of having been shortlisted in several startup awards:

Participating to startups and entrepreneurs’ competitions is indeed a good way to get additional feedbacks on our startup pitch and business model, and the occasion to network.

Launching a business is always challenging, but probably even more in a context of worldwide pandemic with months spent in lockdown… but it was the occasion for us to focus on our product roadmap and R&D—and it allowed us to deliver several innovative products in a record time.

The COVID-19 crisis also exacerbated the awareness on the required transition toward an impactful finance. Today, the European Commission confirmed that no delay will be granted to asset managers to comply with the incoming Sustainable Finance “disclosure regulation” which will require to measure and disclose the ESG impact of investment portfolios, funds, or indexes—Are you not ready ? Don’t worry: we are.

Credit: Photo by Angèle Kamp on Unsplash

3 key takeaways on the PRI taxonomy tests

The PRI released early September a report with case studies from 37 Asset Managers—including e.g. BlackRock, Crédit Suisse, Amundi—, which agreed to test their funds regarding the Green Taxonomy compliance, to be mandatory by the end of 2021. Beyond the exercise itself, positive and necessary, what are the results, and what can we learn? Here are our three key takeaways.

  1. First, let’s start with the funds being tested: they are quite different, hence very difficult to compare. Some AM used fixed income, and others equity funds, another green bonds and climate change thematic funds, and even funds not proposed as “sustainable funds” on the market. Due to the heterogeneous nature of the funds, we cannot compare or benchmark the results.
  2. The taxonomy integration approach are also very different, each AM having its own way—but usually the method is based on external rating providers, which doesn’t support today the taxonomy requirements with their existing ESG scores, designed well before the taxonomy. Some methodologies are based on several suppliers, well known for having divergent view of a same company—the “aggregate confusion” of ESG ratings pointed out by the MIT Sloan study. Another common constatation: the great majority of AM mention the lack of trustable and exhaustive corporate data. When data was lacking, “estimates” have been made. Such a limitation obviously leads to unprecise and subjective ratings… So, yes, we definitively see here that the traditional ESG rating approach hit its limits, and the taxonomy tests case studies are the living proof of that. But how to comply with the regulation, to be applicable in 2021? All AM hope that the market leaders will provide their solutions well before the regulatory deadline—But, considering their ESG scoring approaches, and data… good luck with that.
  3. Eventually, the results: in a word… divergent. It seems easy to get a percentage of the eligible funds depending on the sectors—since the taxonomy defines which sectors are eligible—, but when it comes to the calculation of the compliance score with the taxonomy… well, “surprise”: one AM says less than 5%, others 20%, some other “a majority of the funds” without even providing a percentage… In brief, a nightmare—especially considering that the EU didn’t define any compliance threshold to reach.

we definitively see here that the traditional ESG rating approach hit its limits, and the taxonomy tests case studies are the living proof.

Conclusion

To date, the institutional or retail investors will not be able to understand anything about the taxonomy compliance, and neither who will be controlling the compliance, nor will they be able to discriminate between truly sustainable funds, and others. A taxonomy compliance percentage doesn’t mean nothing, per se: it needs to be explained, justified.

The EU taxonomy is a great project, and it’s absolutely required for the good progress of Sustainable Finance. But the road ahead will be quite long, and for the EU taxonomy to be useful, the final objective must not be lost in the process: empowering and enlightening the sustainable investors, allowing them to understand how much sustainable a fund truly is, in order to make responsible investment choices, based on trustful information— pedagogy and responsibility being shared between the companies, the AM, and the end investors.

Positive Impact Iceberg Model: Why you probably overlooked 90% of your company or positive impact portfolio

The “Positive Impact” thinking has been making the buzz for a while now, but the approach is often mixed up with the more restrictive notion of “Positive Social Impact”, or limited to the direct impact linked to a company “Business Model”, and, by doing so, it misses 90% of a company impact—and, incidentally, of a Positive Impact portfolio composed of “Positive Impact” companies.

The UNEP-FI Principles for Positive Impact Finance indeed define “Positive Impact Business & Finance as that which serves to deliver a positive contribution to one or more of the three pillars of sustainable development (economic, environmental and social), once any potential negative impacts to any of the pillars have been duly identified and mitigated.

An Iceberg Model of Positive ESG Impact

The iceberg metaphor is well known, and self-explicit: 90% of the iceberg is not visible, being immersed below the waterline.

The same applies to the concept of Positive Impact. Most of the Positive Impact portfolios approaches or Positive Impact startups focus on the identification and quantification of the direct outcome of their business model impact: e.g. improving the health of the customer, reducing social inequalities, improving social inclusion or diversity, etc.

This kind outcome is of course very desirable and positive, and its more directly visible. But it’s the top of the iceberg, visible above the waterline.  

Impact, below the waterline

By focusing on the direct business model outcome, the risk is to overlook the overall ESG impact (Environment, Social, Governance), linked to any company’s operations—let’s call it the Corporate Impact—, and particularly to the specific Key ESG Impact topics related to the sector of activity: the Sectoral Impact.

For instance, the Retail and Apparel industry is well known to have strong issues related to water pollution or child labor.

You might say that this is covered by the traditional CSR processes and reporting, by CSR certifications, or by the traditional SRI analysis. The problem with the SRI analysis approach is that it is well known by professional to be poorly relevant, subjective—an “aggregate confusion”, according to the MIT Sloan Sustainability Initiative.

Regarding common (and sometimes trendy) CSR certifications (e.g. EcoVadis, B-Corp, etc.), they are usually based on self-assessment with a strong bias toward the checking of intentions, policies, and signature of initiatives (PRI, PSI, etc.) more than the real outcomes. Recently, a paper indeed questioned the link between a supposed intention, and the concrete ESG performance delivered. Focused on the PRI commitment of Asset Managers, the study concluded that “overall, only a small number of funds improve ESG while many others use the PRI status to attract capital without making notable changes to ESG”.

A good and transparent CSR disclosure process and reporting will provide us with the ESG data required, which is indeed available through different Data Brokers (with, unfortunately, heterogeneous coverages and qualities), after data entry. But to be able to leverage these ESG data, they need, according to us, to be handled appropriately:

  • Quantitative ESG indicator selection: The relevant quantitative ESG indicators to assess need to be carefully selected, among the thousands ESG indicators more or less relevant available on the market. The objective is to be able to evaluate the quantitative outcome—i.e. impact—on the ESG topics. Among others, the coverage of each indicator needs to be taken into account as selection criteria, in order to allow ranking and comparison between peers.
  • ESG Impact scoring: The ESG indicators need to be scored to evaluate the positiveness of the impact, based on quantitative metrics, and specific impact thresholds. As exemplified here above, we must now move beyond intention-checking (such as ESG initiative commitment, or existing corporate policies) to measure the sustainable and positive impact of a company, or investment portfolio, and “do not harm” is one of the guiding principles for the implementation of Impact Scoring.

Conclusion: don’t overlook impact below the waterline!

Positive impact is not restricted to the sole outcome of a company’s business model, and thus needs to be assessed at the global level of a company’s operations, i.e. on the three, and still relevant,  dimensions of Environment, Social, and Governance—and, in case you didn’t notice, that’s precisely why we launched IMPACTIN: Sustainable impact, measured. That’s our motto.

References

5 ways to better engage on ESG—through impact

ESG Engagement is not limited to Proxy Voting policy!

Are you a responsible investor willing to influence the ESG performance of a company you invested in ? Then “Engagement” is probably one of the tools you are using to try to achieve this end.

But the fact is that, today, Engagement has little or no impact on companies’ ESG performance. In most of the cases, the so-called “Engagement” is unfortunately limited to the definition of the Proxy voting policy of the professional investor for the shareholders General Meeting. This is so true that the communication of Asset Managers in their Engagement Reports usually only provides, as key indicators, the respective percentage of votes: FOR, AGAINST, ABSTAIN…

By the way, and as an example, according to a study published by Majority Action in 2019, the 25 largest Asset Managers, during the 2019 general meeting of the Energy and Utilities sector, didn’t systematically vote for the climate resolutions…

Anyway, voting against a company resolution is not truly engaging with a company on its ESG performance: It’s too late. A responsible investor should engage early with companies in its portfolio, in order to have a chance to really influence the policies and operations of companies—for the benefit of us all.

Better Engage on ESG performance, through impact

To go beyond Proxy Voting policies will require to start a true Engagement process through a mid/long-term discussion between interested parties, and build on trust.

And, as a Responsible Investor, looking at the ESG impact performance can offer you several, and non-exclusive, approaches to improve your engagement process—and here is some of them.

1. Identify ESG weaknesses and strengths

Identify a company’s ESG weaknesses and strengths, using ESG impact areas rating, and then target your engagement effort around ESG impact themes: Gender Equality ? Energy consumption ? Tax evasion ? etc.

2. Track ESG progress and trends

Using the historical part of the available ESG impact ratings of a company, track its progress on the several ESG topics of interest identified. Does the ratio of hazardous waste increased ? The proportion of women in management decrease ? These kind of signals can trigger your discussion with the company, based on facts.

3. Benchmark the ESG performance amongst peers

Benchmarking the position of the company ESG impact performance, relatively to its peers within sub-industries, geographies, and other relevant dimensions, will provide you with interesting insights. You could then focus, for instance, your Engagement process on the companies with the greater room for improvement, or foster thematic Engagement on specific developping countries—depending on your Engagement objectives, and Core Values.

4. Converge on quantitative performance indicators

During the discussion phase with a company, within the engagement process, you will be able to propose, discuss, and engage with the company on the improvement of quantitative and positive impact indicators — e.g. percentage of women in management, percentage of renewable in the energy mix, etc.—i.e. you will be able to track facts, and not intentions.

5. Divest—progressively

An Engagement process, obvisouly, takes time. But, ultimately, if the engagement fails, after several cycles, and the company doesn’t demonstrate its willingness to improve its ESG performance—based on quantitifed results—, then, as a Responsible Investor, you should take responsibility for your investment, and also for your end-customer—which might have selected you for your strong ESG values—, and thus divest, from the company, probably progressively, in order to demonstrate your convictions, and allow the company to alter its negative ESG strategy during the process.

ESG Engagement: a responsible investor’s duty 

At IMPACTIN, we think that the current situation regarding Engagement—focused on poorly efficient Proxy Voting policy—is not a fatality, and that another approach is possible.

The ESG impact ratings, available today, empower the Responsible Investors, and provide them with the right tools to better select the more relevant companies in their portfolio, and truly engage on the improvement of specific, quantitative, measurable indicators of positive impact.

As Responsible Investors, you have the power to redirect the investment flows to have a real positive impact on our planet and society. Money, through finance, is a great lever, maybe the greater of all—and remember Archimedes’ saying : “Give me a lever long enough and a place to stand and I will move the earth“. The transition towards a more suistanable economy thus lies in your hands.


3 incoming regulations in Sustainable Finance—will investors be ready ?

Within the coming two years, several regulations on Sustainable Finance will come into effect, which will directly affect the Asset Management, Insurance, and Pension Funds activities. All of those evolutions are emerging from the overall “EU Green Deal” context, and from EU working groups on Sustainable Finance and Sustainable Insurance.

But will concerned businesses be ready ? Already, concerns have begun to be issued. On June, the 9th, several european banking, insurance, and pension funds associations wrote a joint letter to the European Commission, calling for a “centralized register for environmental, social and governance (ESG) data in the EU“, in order to be able to fulfill incoming regulatory reporting obligations… Let’s take a brief look at what is coming.

March 2021: EU Disclosure Regulation

In March 2021, the EU regulation on sustainability‐related disclosures (known as the “Disclosure Regulation”) will become applicable. The regulation will require financial market participants and advisers to provide investors with pre-contractual ESG-related information linked to specific financial products. The objective is to allow investors to make their investment decisions also on the basis of ESG insights.

For instance, regarding positive impact investments, the regulation states that “As regards financial products which have as an objective a positive impact on the environment and society, financial market participants should disclose which sustainable benchmark they use to measure the sustainable performance and where no benchmark is used, explain how the sustainable objective is met“.

2021: MiFID II and the IDD

Expected to be adopted in 2021, the EU Markets in Financial Instruments Directive (MIFID II) and the Insurance Distribution Directive (IDD) regulations focus on ESG considerations . Both amendment initiatives aim indeed at integrating sustainability risks and factors into the investment process.

More precisely, the objective of the IDD, for instance, is to “create a mandatory requirement to take into account ESG preferences in the advisory process (both in the customer profiling and product selection).

Jan. 2022: EU Taxonomy

Finally, the EU Taxonomy for Sustainable Finance will come into effect in Jan. 2022: this regulation  aims to introduce an EU-wide classification system for ESG-related investments. Now adopted by the European Council, the agenda aims to establish the taxonomy by the end of 2020, with full application by the end of 2021.

The taxonomy will “create the world’s first-ever “green list” – a classification system for sustainable economic activities – that will create a common language that investors can use everywhere when investing in projects and economic activities that have a substantial positive impact on the climate and the environment“.

A core objective: Positive impact

A first good point, is that all the initiatives aim at measuring and reporting the environmental and climate impact, in order to contribute to tackle the Climate Change issues. The second good point, is that the objective is wider and not restricted to the environment: all ESG impacts will need to be explained, and reported—the target is the measurement of the overall “sustainable performance”, in order empower the end investors in their investment decisions.

We cannot agree more this mission statement, underlying the regulation—and this will also address the current transparency issue. The challenge investors are now facing is the way to evaluate the ESG impact of their investments. The current ESG rating approaches available on the market cannot provide an evaluation of the impact, and instead offer “an aggregate confusion“, usually anchored in intention- or policy-checking, and subjectivity…

But another approach is possible—and it must rely on quantitative ESG data analysis for a factual positive or negative impact evaluation.

Will investors be ready ? The recent joint letter from the financial investment industry seems to indicate the contrary. But if we don’t yet have the definitive answer to this last question, on our side, we already planned, and developped ESG impact rating solutions to help investors comply, be transparent, and credible.

Portfolio ESG Impact scorecard—the IMPACTIN way

Are you an Asset Manager or an investor wanting to understand the real impact of your fixed income or equity portfolio ? Or maybe do you want to measure the physical risk and mitigation or transition impact of your Real Estate portfolio ? Do you need to measure the alignment of your portfolio vis-à-vis the 17 SDGs ?

Then the whole IMPACTIN team is pleased to announce the launch of our Portfolio ESG Impact & Climate Change Scorecard to you. We designed this scorecard to provide both the positive or negative ESG impact of a portfolio through several dimensions, and provides physical risk, climate mitigation and adaptation scores.

The following ESG performance scores are provided for any scored portfolio, with their associated trends:

  • ESG impact rating scores (x4);
  • ESG Smart Areas scores (x11): Infrastructure, Building, Education, etc.
  • SDG alignment scores (x18);
  • 5P scores (x6) — where 5P stands for Planet, People, Prosperity, Peace, and Partnership;
  • Climate Change scores (x5): Mitigation, Adaptation, Physical Risks and Transition score;
  • Rating class (AAA – D).

It allows both to benchmark a portfolio vis-à-vis market indexes and funds, to promote your fund impact performances respectively to other competitors, and clearly disclose your funds ESG impact to your end customers.

Please contact us for detailled information, discussion and samples!

Climate Change and Physical Risk scored for 1554 territories featured in IMPACTIN last dataset

The IMPACTIN Countries and Territories Climate Change and Physical Risk Mitigation and Adaptation Rating dataset is our new Data Product available on the DAWEX data marketplace.

Our Climate Change Adaptation and Climate Change Mitigation ratings are based on guidelines from the EU Taxonomy for Sustainable Activities framework and the EEA, on both topics. The EEA is the European Environment Agency of the European Union.

Climate Change Mitigation means the reduction or prevention of the emissions linked to human activities, such as, e.g., CO2 and GHG, or fluorinated gases (F-gases), whereas the Climate Change Adaption regards actions to adapt to the impacts of climate change, already happening: flooding, droughts, sea level rise, wild fires, rainfall patterns alteration, etc.

Climate change is already happening […] This leads to many adverse impacts on ecosystems, economic sectors, and human health and well-being. Therefore, actions to adapt to the impacts of climate change are paramount and should be tailored to the specific circumstances in different parts of Europe

— European Environment Agency

This dataset provides 14 climate change and physical risk scores and trends for 1554 territories, i.e. countries, regions or cities, for a total of 21,756 data points. The following numbers of territories are covered:

  • 200+ countries,
  • 650+ regions,
  • 600+ cities (urban areas).

The scores and data included in the dataset provide the following information, for each territory featured:

  • Territory general information: code, name, country, population, geographical coordinates, etc.;
  • Climate Change score;
  • Climate Change Mitigation score;
  • Climate Change Adaptation score;
  • Physical Risks score: exposure to natural hazards such as flood, droughs, tsunami, etc.;
  • Climate Change Transition score;
  • Rank in territory group (countries, regions, cities);
  • Rating class.

The associated data theme is available on the DAWEX marketplace, feel free to contact us for a sneak peek at the data offer online: dataset content, samples, dataset structure, cities and regions coverage maps!