Your banker has probably talked to you about it, new rules now require us to move away from being reckless capitalists without scruples and instead steer the building of our savings towards responsible investments.
So what is sustainable finance?
Sustainable finance aims to reconcile financial performance with sustainable development. Several 'labels/certifications' have been created to assist investors in selecting funds for their financial investments.
Banks, insurers, mutual companies, investment advisors, and asset management firms offer sustainable finance funds. They can be held in a brokerage account, a PEA (equity savings plan), or as units of account within life insurance policies or savings plans, as well as in employee savings schemes such as PEE, PER, or PERCO accounts.
1. SRI (Socially Responsible Investment)
Socially Responsible Investment (SRI) denotes values (via funds or directly) that reconcile conventional financial standards with non-financial standards referred to as ESG (Environmental, Social, Governance).
Before investing in an SRI fund, it's important to understand the fund's SRI investment strategy, as there are several:
The "Best" approach: selecting the best companies:
"Best-in-class": i.e. the best companies in a category. In other words, those with the best extra-financial ratings in a given sector.
"Best-in-universe": the best-performing companies on extra-financial criteria in any sector.
"Best-effort": companies that are improving or have good prospects in their ESG practices and performance over time.
The "thematic" approach consists of investing in companies active in sectors linked to sustainable development (climate change, renewable energies, water, etc.).
The "impact" approach consists of choosing companies whose aim is to generate a measurable positive social and environmental impact.
The "ethical" approach, which consists in retroceding part of the profits generated by the fund to charities (sharing funds), or dedicating all or part of the savings collected to financing solidarity economy projects (solidarity funds).
The "shareholder" approach consists in influencing companies by using their shareholder rights to push them to improve their ESG practices. In this way, shareholders use their voting rights at Annual General Meetings to steer company policy in line with the values they wish to defend.
The "exclusion" approach, which consists of excluding from the investment universe companies that do not meet minimum socio-environmental criteria. There are several types of exclusion:
Sectoral exclusion: companies that derive their sales from activities deemed harmful to society are excluded.
Normative exclusion: companies that do not comply with certain international standards are excluded.
Exclusionary strategies alone are not enough to create SRI funds. They must be combined with other strategies. A single fund generally combines several of these investment approaches.
Labels/certifications have been created to guide investors in their responsible investment approach. These labels are not compulsory; it is up to management companies to decide whether or not to label certain of their funds.
Label SRI
Socially Responsible Investment label: created in 2016 by the French Ministry of the Economy and Finance, this label is awarded to funds investing in companies with responsible environmental, social and governance practices.
Since its creation, the label has been awarded to mutual funds invested in equities and/or bonds. And since 2020, alternative funds (FIAs) and in particular real estate funds (SCPIs and OPCIs) have also been eligible for the label.
An overhaul of the SRI label is planned for 2024. To obtain or retain this label, funds will have to make a stricter selection on environmental, social and societal criteria, as well as governance (selectivity rate increases from 20% to 30%). They will also have to limit the negative impact of their investments in these areas.
The new standards will come into force on March 1, 2024 for new funds. Existing funds that have already been awarded the label will have one year to update.
Greenfin label
Greenfin label (formerly TEEC label): created by the French Ministry of the Environment, Energy and the Sea in 2015, it is awarded to funds investing in the green economy and excluding companies operating in the nuclear and fossil fuel sectors.
2. European MiFID2 obligations relating to sustainable finance
Since August 2, 2022, investment service providers (PSI status) have been obliged to have their clients complete an ESG questionnaire to determine their sustainability preferences prior to any financial investment proposal. This obligation will be extended to asset managers with CIF status from January 1, 2023.
The results of this questionnaire will enable financial advisors to make financial investment proposals that take account of their clients' sustainability preferences.
A. Sustainability preference
Customers' preference for sustainability is analyzed along 3 different axes:
The proportion of the investor's investment to be aligned with the taxonomy,
The proportion of the investor's investment to be placed in "sustainable investments" as defined by the European "SFDR" regulation,
How the main negative impacts are to be taken into account.
A.1. European taxonomy
Under European regulations, financial advisors must use the ESG questionnaire to determine the proportion of their clients' investments aligned with the "taxonomy" regulations.
These regulations establish 6 environmental objectives:
Climate change mitigation
Sustainable use and protection of aquatic and marine resources
Pollution prevention and reduction
Adaptation to climate change
Transition to a circular economy
Protecting and restoring biodiversity and ecosystems
The regulations also provide for an evolving list of eligible economic activities, such as forestry, energy, transport, finance and insurance, manufacturing, etc. The activities selected are those likely to have a positive and significant impact on the environment.
An eligible economic activity is aligned with the taxonomy if:
It makes a significant contribution to achieving one of the above objectives;
It does not undermine any of the other 5 objectives;
And that it respects the minimum guarantees of human rights.
A.2. Sustainable investments within the meaning of the "SFDR" regulation
The financial advisor must determine the proportion of sustainable investment as defined by the SFDR regulation. Sustainable funds according to the SFDR regulation are so-called "Article 9" funds.
This regulation defines sustainable investment as an investment in an economic activity that contributes to an environmental or social objective, without causing significant harm to other environmental or social objectives, and in a company that applies good governance practices.
This criterion is broader than that of taxonomy.
A.3 Addressing the main negative impacts (PAI)
The main negative impacts are the adverse effects of investment decisions on the environment, social issues, respect for human rights and the fight against corruption. They are taken into account at 2 levels:
At the level of the management company: it publishes information on whether and how major negative impacts are taken into account in its investment decisions.
At investment level: the management company specifies whether and how the investment takes into account negative impacts.
Using the ESG questionnaire, the financial advisor must determine whether the investor wishes to take into account the main negative impacts, specifying the type of impact (e.g. greenhouse gas emissions) and the degree of consideration.
B. How do you determine whether a fund is sustainable?
Management companies must indicate on their Key Information Documents (KIDs) (and more generally on their website) whether their funds are sustainable within the meaning of the European regulation. Thus :
Funds aligned with the taxonomy: the DICI may indicate a percentage of alignment with the taxonomy on a fund's DICI. If no information is given, then the alignment is 0%.
As you can imagine, it's not easy for professionals to raise funds for their customers. But as the legend of the Hummingbird says, if everyone does their bit, the community wins!
To find out more about our selection of profitable SRI funds, please contact your preferred advisor at mg@capitalconseils.net.
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