Directing capital flows towards more virtuous companies to meet environmental and social challenges is essential and is part of the European Commission's regulatory initiatives via the green deal.
While some companies are directly involved in the climate transition or the preservation of biodiversity through their activity, this is not the case for all of them. Some do not respond directly but have initiated a transition via their production methods or a reorientation of their product or service offering. Others, on the other hand, still seem unconvinced by the climate emergency and believe that financial performance does not go hand in hand with sustainability.
Nevertheless, it is necessary to accompany all these actors towards sustainability and it is partly for this reason that sustainable finance regulations exist. It encourages good practices and forces the most reluctant to become more responsible.
The other key role of regulation is to avoid greenwashing and to this end, it wishes to control the use of terms that are too easily used, such as ESG, sustainability, responsible.
If we start from these observations, we should be on the sustainable finance highway and see increasingly ambitious practices marching alongside us. The reality is a little more mixed.
Because today, if you are sustainable, you have to prove it. And that's where the problem lies:
We therefore find ourselves with financial actors who either do not wish to comply with all the requirements of sustainable investment, or who do not understand what is required of them by the regulations and are afraid to put themselves at risk.
For many, the easiest solution is not to strengthen their ESG commitments.
This is what a recent Morningstar study shows us: 307 Article 9 funds have been downgraded to Article 8!
Let us recall that today an investment qualified as sustainable in the sense of SFDR is an investment in Article 9, whose pocket is made up of 100% of companies that have already made an environmental and/or social transition. This notion of sustainability seems to exclude companies currently in transition.
A definition that does not seem to suit everyone, as many investors wish to include companies in transition in this definition and are even encouraged by the French regulator to do so.
But then, between what is officially said, what is encouraged and what is done in practice... how to find your way?
To illustrate our point, let's take the example of an investor who wants to create a green fund (in the sense of Art. 9 of the SFDR regulation), committed to an environmental theme.
Should this investor only focus his portfolio on companies whose activity is already considered low-carbon? Or can they look at companies that are less virtuous today but have ambitious commitment plans to accompany them in their transition?
Faced with what seemed to us to be a general vagueness, the WeeFin teams analyzed for several weeks 17 asset management companies (AMCs) and 3 data providers in order to understand what methodologies these companies use to define sustainable investment and its operational application.
If we start from the framework given by the SFDR regulation on sustainable investment, we can highlight 3 conditions to be met. At first sight, these conditions are quite broad and are very much inspired by the European taxonomy.
According to SFDR regulations, a sustainable investment :
As we said at the beginning of this article, a rapid and clear transformation of investment practices must take place. But finance will only become more sustainable if it abandons its traditional opacity.
The regulator needs to establish clearer rules so that investors are fully aware of what is expected and no longer see regulation as an unclear constraint that puts them at risk.
In addition to the urgent need for guidelines from the regulator, it is in the management of data that the most important work remains. Greater visibility is not only needed in strategy, but also in scoring methodologies, because at the moment, it is the financial players who ultimately decide on the methodology and the level of severity used in their own definition.
Moreover, it is only with increased transparency and more refined management of ESG data that it will be possible for each player to enhance its own vision of sustainability and for the final investor to make an informed choice about his investments.
We are also convinced that the definition of sustainable investment must include actors in transition, something already desired by most market players and by the AMF.
If the most reluctant investors can be discouraged by this complexity and the most committed actors, tired of the slowness of things, let's not forget that Rome was not built in a day and that it is by being numerous to want to change the methods of investment, that we will be able to make things happen.
And of course, part of the solution for investors may lie in partnerships with fintechs. Technology can help facilitate the deployment of regulation and a tailored ESG strategy.
At WeeFin, we have created a SaaS platform that allows our clients to cross-reference numerous ESG databases from different providers, to test their quality, to define customized indicators according to their investment strategy, and to produce all the reports, including regulatory ones, that are required on ESG.
