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

According to the Novethic indicator, published last week, the offer of sustainable funds is massively growing in France, combined with an always more demanding retail market. This situation is not unique in Europe: the same trends are reflected in the national markets of countries such as Italy, Spain, or the United Kingdom, etc. The trends and market data are furthermore indisputable: in 1 year, between Dec. 2018 and Dec. 2019, the number of sustainable funds has grown from 438 to 704, and AUM have almost doubled, from €149bn to €278bn.

There is indeed a very strong momentum for Sustainable Finance, and especially for Thematic Funds, representing a quarter of the offer, but with a greater collection ratio (45%) compared with non-thematic sustainable funds.

So far, so good, we might say, but, but, unfortunately, quantity is not a synonym for quality. Behind the scene, for most of all these “so-called” sustainable funds, the situation is far from brilliant, when the ESG criteria’s quality is investigated… with a transparency almost lacking.

The french “Label ISR” (SRI Label) as so far been granted to 263 funds, among other certified funds with a national label. This kind of label is supposed to be the first step on the way towards a greater transparency, but it is still, today, not sufficient to be fully trusted, and here is why: the Label ISR only ensures that a selection process exists, and that it integrates ESG criteria. The rest is left a the discretion of the fund manager: how the process is applied, what are the thresholds, etc. For instance, a Label ISR fund doesn’t need to be 100% ESG-compliant. No opinion is provided by the certification authority on the companies composing the funds, or the quality of the method used, the existence of positive or negative impact metrics or score… And regarding the non-labelized sustainable funds, the situation is even worst and more obscure… with sometimes only a slight “greening” for some new or existing funds…

These are some of the reasons why the EU Taxonomy, and the future EU Label, are more than welcome. Let’s hope they will both help to provide more transparency in sustainable finance, and foster a truly sustainable investment approach. The risk faced, once again, is the generalization of greenwashing to gain market shares, which will end in the disillusion of the retail investor and strip the sustainable finance market of its whole credibility…

Until then, quantity will continue to prevail over quality, as a sign of the times.

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

As the poet said, nothing is more powerful than an idea whose time has come. And the two last weeks probably demonstrated that the time for ESG criteria integration into country rating might have come…

Last week, we attended the One Planet Sovereign Wealth Funds initiative reception, being held in Paris, at the Shangri-La hotel, and co-organized by Bloomberg. Since 2017, the SWFs have been working to accelerate efforts to integrate financial risks and opportunities related to climate change in the management of sovereign funds and large assets. Their moto: “Integrating Climate Change Risks and Investing in the Smooth Transition to a Low Emissions Economy“. Bloomberg, through GBF, the Bloomberg Global Business Forum, is also committed to improve social and economic wellbeing in the coming decades. During the dinner, were 200 people from different countries gathered, discussions focused on the climate change urgency, and the need to take action, with no further delay.

Nothing is more powerful than an idea whose time has come.

— Victor Hugo

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

Well… time is on our side, yes it is!

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

Several approaches of countries ESG rating, and worldwide ranking, are currently available on the market, mostly based on hundreds of qualitative and quantitative data. They are very similar, and share the same limitations: they do not systematically try to measure the ESG impact of a country, and agregate too many indicators, ending with a non-sensical ratings and rankings, which, e.g. benchmark highly developed countries together with emerging ones… and dilute the score of the rated country.

And then, there is the United Nation SDG initiative, which also provide, for its high-level 17 Sustainable Development Goals (SDG), a list of hundreds indicators, updated on a yearly basis, with a heterogenous coverage depending of the country. The UN SDG evaluation ends with surprising results. For instance, the Goal #1, “No Poverty”, can be considered, according to the UN, as achieved both by France and Italy, with a respective score of 99.5% and 97.5% reached regarding extreme poverty… which is obviously not the case when, according to Eurostats, there is respectively 17.1% of the French and 28.9% of the Italian population at risk of poverty and social exclusion…

Traditional financial rating agencies, such as Fitch, S&P, etc., have tried to integrate the ESG rating in the country credit rating, with quite mitigated results… For others, the ESG rating should remain independent, or is not considered that much important, excepted for the G, the Governance part… the overall situation is unclear, and thus the research goes on. How to make sense of all that fuzz ? Indicators are indeed trustable (when of quality), but their interpretation depends on their nature, context, threshold…

According to us, a meaningful ESG rating and ranking is not only possible, but also absolutely essential and necessary. Only ESG criteria can allow us, today, to really discriminate between countries: not to recognize this point means promoting the financial indicators supremacy, and its disconnection from reality, with the deadly societal and environmental consequences in the long term, that we are now all well aware of…

With countries bonds representing representing more than half the AUM of financial investments, worldwide, the question of the integration of a reliable ESG rating into the credit rating balance must be raised, and answered—urgently.

$1,000bn: this is the forecasted size of the Green Bond market by 2021, according to HSBC. And Green Bonds are not only issued by corporations, but, increasingly, by countries, territories, or cities. It gives an idea of the importance to tackle this issue, and to provide as soon as possible a way to reliably evaluate the ESG performance and impact of Green Bonds, which means first having this reliable ESG impact rating for countries, cities, and territories. The credibility of those instruments is here at stackes.

That’s why during the last months, we had been researching, and working on ESG Impact rating methodologies, and ended with our own proprietary methodology for countries, which provide an ESG Impact rating, covering 6 ESG areas, a Transition Rating, and a SDG compliance rating, for each country. Our unique approach is to combine our sound human expertise in the field of CSR, ESG, and SRI, with a limited set of meaningful, smart indicators. IMPACTIN countries rating allow us to truly discriminate the respective performance of countries regarding ESG stakes, and to track a nation progress along its social and environmental transition.

Measuring and tracking progress, like a mantra, getting insights and adjusting the journey accordingly to the ESG goals: this path towards a more sustainable society requires meaningful, and smart ESG Impact indicators and scoring, at the country, city, corporation, or investment portfolio levels. And that’s why we provide all four of them.

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

The end of a year—or the beginning of a new one—is generally a propitious period for the (healthy) exercise of the retrospective. So, let’s look back at 2019, and try to foresee what’s coming in 2020, in the domain of sustainable finance, and sustainability in general.

In March 2018, the EU published its “Action Plan of Sustainable Finance” — a shorter name for the officially called “Commission action plan on financing sustainable growth“.  In 2019 not only the EU process accelerated, but many events also took place, in the sustainable world:

With such a global context, the risk is greatly increasing for companies, and for the countries, to be the target of legal procedures, initiated by citizens or NGOs. No doubt that the coming years will see this kind of legal case proliferating—and both companies or countries signatory of any convention (PRI, etc.), or with any moral obligation disclosed (code of conduct, sustainable guidelines, etc.) should worry about the effective respect of their own—publicly or privately taken­—engagements…

Sustainability cannot be reduced to the sole climate change issues. A sustainable society must not only transition toward a zero emissions objective, but it must also endeavor to suppress all forms of discrimination, corruption, and provide social justice, among other ESG goals.

To achieve this broader view of a sustainable finance, beyond the short term urgency of Climate Change issue, which must be now tackled with no delay, several profound evolutions in the approach of capital investment will be required: 

  • Capital flows must be reoriented towards a more sustainable economy. Transparency and long termism must be fostered in financial economy activity–The EU made indeed an excellent work considering that the current gap between the real economy, and a sustainable economy, is still a very huge one. For instance, customers’ expectations are becoming stronger and stronger vis-à-vis sustainable issues, but little has been achieved so far to fill this gap. The financial market needs so to listen to the “voice of the customer” and adapt the economical choices in this direction. To date, this is really not the case, and the investments are still not sufficient, and with no clear objectives…
  • Financial risks, and ESG impact linked to environmental and social activities, must be (better) measured. The EU is asking to foster the integration of the ESG in the credit research, and all financial and extra-financial research activities are thus concerned. To this end, the development of a common methodology, to be widely accepted by all the market, would probably be needed. Today, many approaches for the analysis of ESG topics are existing, but not for all the different classes of assets, and they are often very difficult to understand. A lot of work will be required to harmonize, and to create the solutions… Innovation will be fundamental to achieve this goal. The EU opened the path with the taxonomy, but all the work still needs to be done. Green bonds and SRI funds are strongly growing, but a reality-check of the real impact of these investment instruments need to be created. For instance, take the Green Bonds market, where the intensity of the “Green” for each project is very questionable, and different… we will also probably need the creation of a European commission to verify the accuracy of the granting of these labels… To make the sustainable market more transparent, hence credible, is absolutely essential to win the confidence of the customers.
  • Clear and measurable ESG goals must be defined and monitored in the companies or investments project, or in the investment funds. The end objective should be to measure the sustainable impact of the investments on the society, i.e. the creation of a sustainable value. To this end, such kind of KPIs should be integrated in the boards’ goals, in the grants, etc.

2020 should be a year of very hard work for people in finance, and the challenge is very high: to transform a purely ROI-oriented finance into a sustainable finance, to minimize—as much as is still possible—the effects of the climate change, and achieve a resilient economy. True conviction, and transparency are unescapable to avoid falling in the traps of sustainability/greenwashing… And to make this possible, the top management of the Finance sector must lead the way.

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

In June 2019, this year, 2,832 funds proclaimed to use ESG criteria, of which 168 have been created during the 1st semester of 2019.

Thematic funds were notably started by Pictet Asset Management in the 2000’s—with their first fund focused on water. Today, this kind of investements represents for Pictet AM EUR 40bn AUM, declined on different themes. Over the past 20 years, 10 new themes have been created: Timber, Smartcity, Nutrition, Security, Biotech, Digital, etc.

Their scope ? Listed companies. Their targeted customer segments ? Retail, Insurance, Asset Managers, Pension funds, Banks…

Thematic ESG impact funds have today their own momentum. Why is it so ? Because a theme gives investement a purpose, easy to grasp for the investor. And because ESG issues are the very core of our today’s concerns. And although thematic investing had been around for 20 years now, it only represents a mere 14% of the USD 28tn ESG AUM—there is still a very huge potential for growth.

We can thus expect ESG Indexes to gain also more and more traction in the passive asset management sector.

But Thematic ESG funds also come with limitations. Their biggest current problem is probably that—paradoxically—thematic ESG funds doesn’t systematicaly integrate ESG criteria… It means that, despite the fact that the theme of a fund can be, e.g., a Social or Environmental topic, the companies or states listed in the fund could nevertheless either be involved in ESG controversies, or can have a very poor ESG rating.

Here, no doubt that transparency, and thus credibility, will be a key—to avoid the greenwashing / impactwashing drift. And, when they exist, ESG Labels could also help—even if they can certainly be improved… The EU is indeed working on sustainable finance labels, and also promote a greater transparency on the existing ESG indexes.

To overtake these current limitations, and become more massively adopted by the market, we think that Thematic ESG funds should thus:

  • Propose innovative themes, taking into account macro-economic trends;
  • Systematically integrate ESG criteria, in the companies and countries selection process;
  • Measure and report the ESG impact of the fund, on the environment and the society, i.e. its capability to deliver a real value for our human societies.

That’s why, to help our customers to achieve these goals, we created our own Thematic ESG Impact Funds Library, with 30+ innovative funds concepts, and our own proprietary ESG Impact rating framework. Interested ? Let’s start the discussion.

Salon des Maires et des Collectivités Locales (SMCL) 2019 — retour sur des tendances durables

Du 19 au 21 novembre s’est tenu le Salon des Maires et des Collectivités Locales 2019, à Paris, Porte de Versailles. Nous avons visité ce salon, et s’il y a bien une tendance à retenir, c’est la suivante : « Transition Énergétique et Écologique ».

Cette tendance, qui s’inscrit logiquement dans le thème global du salon­—Villes et Territoires durables, horizon 2030—, reflète bien un sujet majeur de préoccupation, à retenir pour les villes françaises en 2019, et au-delà. Le projet de Territoire Intelligent (Smart City) d’Angers Loire Métropole (ALM), attribué la semaine d’avant à un consortium mené par ENGIE, en est d’ailleurs emblématique : les objectifs affichés par ALM sont notamment d’ « accélérer la transition écologique du territoire » et  permettre « d’importantes économies d’énergie » au travers de la mise en œuvre d’une plateforme d’hypervision de la ville. En deux mots, un territoire plus durable, grâce à une plateforme connectée aux infrastructures urbaines « intelligentes ».

Le sujet de la transition énergétique et écologique s’invite bien évidemment au cœur des stratégies des villes du fait de l’urgence climatique — comme l’ont encore montré les tragiques évènements climatiques extrêmes, qui se sont reproduits dans quart Sud-Est de la France. Ce sujet, bien qu’essentiel, n’est pas seul qui, nous semble-t-il, devrait occuper les esprits.

Dans une perspective d’impact ESG plus large des villes et territoires, nous avons ainsi développé notre propre solution de notation d’Impact des villes, qui comprend 11 domaines d’impact spécifiques. Dans ces domaines se retrouvent ceux aujourd’hui au centre des préoccupations, et qui concernent l’Énergie et Environnement, ainsi que la dimension de « Connectivité » de la ville (Communications, Infrastructures « Intelligentes », etc.), mais aussi d’autres dimensions essentielles à nos yeux pour mesurer l’impact ESG d’un territoire : Éducation, Gouvernance, Sécurité, ou encore Santé, à titre d’exemple.

Les zones urbaines, rappelons-le, regrouperont d’ici 2050 près de 70% de la population mondiale, d’après l’OCDE, alors que seulement 34% y vivaient en 1960. L’avenir de l’humanité est donc forcément entre les mains des villes, qui sont aujourd’hui les principales sources de pollution et les zones les plus à risque, mais qui constituent aussi et surtout, avec leurs éco-citoyens en devenir, notre plus grand levier pour accélérer la transition durable des sociétés humaines—et sans doute notre seul espoir.

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

The 2019 French Mayors and Local Authorities Fair (Salon des Maires et des Collectivités Locales 2019) was held from the 19 to the 21 November in Paris, Porte de Versailles. We visited the exhibition, and if one trend has to be recognized, it is the following: “Energy and Ecology Transition”.

This trend, aligned with the fair global theme—Sustainable Cities and Territories, 2030 Horizon—, is indeed the sign of a main stake for the French cities, in 2019, and certainly beyond. The Smart Territory project of the Angers Loire Métropole (ALM), won by a consortium leaded by ENGIE, and attributed the week before the fair, is probably emblematic of this trend: the declared main objective of ALM is to “accelerate the ecological transition of the territory” in order to allow “important energy savings “, by leveraging a city hypervision platform. In summary, A more sustainable territory, thanks to a smart city platform connected to smart urban infrastructures.

The domain of energy and ecological transition is of course now at the very core of the cities’ strategy due the climate change emergency—tragically demonstrated once again a week ago by the deadly extreme weather event that occured in the South-East of France. This domain is absolutely essential, but, from our point, it should not be the sole concern here, when it comes to cities and territories sustainability.

From a broader ESG impact perspective, we have thus developped our own proprietary Cities and Territory Impact Rating solution, which comprehend 11 impact domains. Amonst them, the ones currently raising attention, Energy and Environement, can be found, along with the territory “Connectivity” dimension (Communication, Smart Infrastructures , etc.), but also other domains we consider essential to measure the ESG Impact of a territory : Education, Governance, Security, or Healthcare, for instance.

It must be remembered that urban areas, according to the OCDE, will concentrate, by 2050, almost 70% of the wolrdwide population, whereas only 34% of this popluation was living there in 1960. The future of mankind lies indeed in the very hands of cities, which, today, concentrate also the main pollution sources and the zones the most at risk, but they also constitutes, with their billions of to-be eco-citizens, probably our best leverage to accelerate the sustainable transition of human societey—and certainly our only hope.

ESG and insurance underwriting: everything still needs to be done

How are Insurance companies integrating ESG in their core business? To start with, let’s have a look at the most impacting domains. Obsiously, two activities are mostly concerned with ESG aspects, and Climate Change issues. On the first hand, we find the Investments activities, since the insurance business is an investment-intensive activity, and any insurer thus invests the money of its customers. On the second hand, one of the mostly concerned activity is the underwriting—which concerns all things related to the insurance contracts and policies, both for the individual, or for the corporate customer.

The insurers—or, at the very least, the biggest of them—have been integrating, for years now, the ESG criteria into their investments… in a more or less serious way. But the real core of the insurance business is not the investement per se, and the asset management activity is indeed usually operated within a separate branch. Their existing approaches are unfortunately generaly very far from providing real anwsers, to real-world problems.

For whom the bell tolls

Climate Change, for instance, is not only a real-world stake, and insurers are not only one of its main actors, but, more problematically for them, one of its most (indirectly) concerned “victims”: the consequences of Climate Change have indeed a strong impact on the frequency and intensity of extreme weather events (sea level rise, flood, storms, etc.), with an increasing financial impact on the insurers finance, and their reinsurers: Year after year, the situation greatly exceed all the forecasts, both in term of weather or budget…

With the expected aggravation and unpredicatability of these natural disasters, in a maybe not-so-distant tomorrow, could hence insurers be put on default ? The modern role of an insurer should indeed not only to pay—when it’s too late (i.e. after the occurence of a risk)—but, more important, its role should be to prevent, or reduce, as much as it is possible, the occurence of the risks… a principle which is maybe currently too much out of sight within the insurance business—when it comes to the ESG stakes.

When I’m speaking of more or less serious approach to the integration of ESG topics in the insurance business, I’m particularly questionning the idea of, e.g., integrating ESG criteria, whereas at the same time continuing to invest in enviromentally or socially detrimental activities, such as fossils fuels, dangerous pesticides, etc.

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

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

As a modern investor, do I indeed really want my capital to be invested in activities currently compromissing the future of mankind, if not of the whole planet ? My own future, and the future of my children ?

—It tolls for thee

We are all in the same boat—a ship of fools… Thus, today, it must be first stated, to the insurers’ investment companies truly wanting to progress in the right direction, that exclusion policies are no longer enough—especially when the results are not publicly disclosed, and are thus, silently, regressing, instead of progressing. And, in 2050, it will be too late to take action, considering the current environmental impact of human activities, and the CO2 emissions released into the atmosphere.

No man is an island entire of itself; every man is a piece of the continent, a part of the main; if a clod be washed away by the sea, Europe is the less, as well as if a promontory were, as well as any manner of thy friends or of thine own were; any man’s death diminishes me, because I am involved in mankind. And therefore never send to know for whom the bell tolls; it tolls for thee.

— John Donne, Meditation XVII, Devotions upon Emergent Occasions, 1624 (translated from Early Modern English)

But where to start ? For instance, a Carbon Footprint of all investments instruments could be disclosed—to date, very few investors disclose such information—along with a true Energy Transition strategy. Here again, we could count the insurance companies on the fingers of one hand… Even worst, in the underwritting domain, everything still needs to be done, in order to integrate the ESG criteria into the insurance underwritting process.

The UNEP FI PSI initiative, Principles for Sustainable Insurance, is laudable, but so far it brings no, or little, solution on the table. It’s nevertheless a must-read, and inspiring source for the insurance top-management, and one which sets the moonshot for the whole industry.

Sustainable insurance is a strategic approach where all activities in the insurance value chain, including interactions with stakeholders, are done in a responsible and forward-looking way by identifying, assessing, managing and monitoring risks and opportunities associated with environmental, social and governance issues. Sustainable insurance aims to reduce risk, develop innovative solutions, improve business performance, and contribute to environmental, social and economic sustainability.

The UNEP FI Principles for Sustainable Insurance

A maybe sharpest approach is the one proposed by the EU through its taxonomy for sustainable activities, published in June 2019. The document underlines the role of Insurance as a key sector in the economy transition and climate mitigation. It thus demand to the whole sector to assume its full responsibility in the integration of ESG criteria into its core business. The work produced by the EU is of a great quality, and rooted in strong convictions. Let’s hope it will help foster the transition toward a more sustainable world.

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

But will these requests of the EU and UN be followed by concrete actions from the industry ? The answer lies in the hands of the insurance sector. The context is nevertheless clear enough—those who want to survive and still be there in 2050 need to take action. Now. But the insurers need to be commited to integrate ESG risks into insurance underwritting not only because their customers, or shareholders require it, but because their financial future—and our own future—depends on it. It’s a question of survival, which needs to be fully understood, and integrated on a daily basis, by the top management, and the whole management. Then things could be set, eventually, in movement, and positive impact delivered, possibly very quickly.

Integrating the ESG riks in the insurance underwritting is, indeed possible. It requires, mostly, a commitment to achieve this goal, and the right approach. That’s why, at Impactin, we have developped our own insurtech solution allowing to score the ESG risks of an insurance contract, to measure the ESG impact of a corporate insuree’s activity, and even to accompany the corporate insurance customer into its positive impact journey, and ecological transition—for the greater good.

Yes, all of this is possible, there are no excuses any longer in the Insurance sector—and our mission here is to help you achieve your own sustainable goals! Let’s get started.


Impactin’ Singapore, the Lion City

After having spent in Singapore our first week of our activity, for our very first contract, we can tell that Singapore is certainly not a random destination when it comes to Sustainable Finance.

The City-State is indeed the 5th market in this domain in Asia (excl. Japan), with a share of 11%, after Malaysia, Hong-Kong, South-Korea, and China. The Fintech landscape is also very active, with a strong commitment of the Regulator to develop this domain—and, in effect, Singapore Fintech Festival SFF x SWITCH, is starting today for 5 days of financial innovation (11-15 Nov.).

Furthermore, the whole Asia Pacific region has become the world’s growth pole, with 40% of the global GDP in 2018—but is also contributing to 48% of the world’s total CO2 emissions, and is exceptionally exposed to climate change impacts: sea level rise, extreme weather, high temperatures, etc.

In this context, it is thus really worth noticing that Asia’s share (excl. Japan) only accounted for 0.2% of the global sustainably managed assets in 2016 (ie. USD 52bn vs. USD 23tn), i.e. for 0.8% of the Asian assets (excl. Japan), with a predominance of Sharia funds, representing a third.

Asia is thus a region with both serious ESG challenges, and with an incredible potential for transformation—and we, at IMPACTIN, hope to be contributing on it in the coming months!

Stay tuned,

— The IMPACTIN team is live! is live!

Our website is officially launched! Our newly incorporated company, Impactin, stands at the crossroad of Fintech, Insurtech, and Sustaintech.

We build unique and innovative ESG impact rating and investments analysis solutions to truly evaluate and manage the impact of investment, insurance, territories, or corporate activities.

More articles will soon be available, stay tuned!

— The Impactin team