Finance

The Eldorado of responsible finance

Funds aimed at promoting responsible finance are popular. The combination of financial performance and consideration of sustainable development issues has everything to attract savers who are increasingly concerned about the impact of their investment. However, the lack of transparency of some supposedly sustainable funds can mislead savers.
The Paris Climate Agreement in 2015 gave a new dimension to sustainable finance. The objectives of reducing greenhouse gas emissions in the coming decades to achieve carbon neutrality by 2050 indeed require colossal investments to finance the energy transition.

A boon for green finance which has attracted hundreds of billions of euros of capital in recent years. According to the latest AFG data, responsible finance assets amounted to 1,587 billion euros at the end of 2020. The consideration of extra-financial ESG (Environmental, Social and Governance) criteria in the constitution portfolios tends to become generalized. If this trend responds to a political will to green financing or at least to direct it towards virtuous sectors and companies, it also responds to the need of savers to give meaning to their investments. The pandemic has even accelerated this desire to be useful to society. An Ifop survey[1] for the Responsible Investment Forum (FIR) carried out in 2021 suggested that 59% of savers gave an important place to environmental and social impacts in their investment choices.

European regulations

The democratization of so-called responsible finance has led to the marketing of a large number of funds with sustainable ambitions. The lack of transparency on the composition of the portfolios and on their sustainable development objectives has also fueled criticism of “greenwashing”. Regulators have realized that financial flows do not systematically participate in the financing of the ecological transition. Similarly, the stock picking methodology sometimes lacked rigour. In this context, it has become urgent to recreate confidence among savers and to redirect capital towards the real financing of companies that participate in the emergence of a more sustainable economy.
To fight against greenwashing, the European Union has legislated by categorizing investment products to measure the degree to which ESG criteria are taken into account. The “Disclosure” regulation applied since March 10, 2021 in the member countries of the European Union defines 3 families of products known under the names of article 6, article 8 and article 9.
Articles 6 concern all UCITS which, in constructing their portfolio, do not take non-financial criteria into consideration. Conversely, Articles 8 and 9 integrate ESG criteria into their investment methodology. But unlike Article 8 funds, Article 9 UCITS go further by pursuing a specific extra-financial objective, for example the fight against climate change or the preservation of water. The managers select the companies most committed to this theme by implementing virtuous practices in the conduct of their business or innovative companies that develop sustainable solutions.

Increased transparency

Good intentions are not enough to ensure trust. The European regulator requires managers to communicate via their reporting on the actions implemented in the funds to achieve the objectives of sustainable development.
The documentation should detail their investment decisions and related sustainability risks with possible negative implications for their funds. They have the obligation to list them but also to measure them. The obligations of communication but also of research on the process of selection of securities lead to higher management costs but which tend to be reduced with the generalization of this sustainable approach to finance.

[1] Survey conducted by Ifop for the Responsible Investment Forum – https://www.frenchsif.org/isr-esg/wp-content/uploads/210927_CP_Resultats_Sondage_FinanceResponsable_FIR-Ifop.pdf

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