how best to identify “socially responsible” investments?

A recent survey conducted for the Autorité des Marchés financiers (AMF) highlights that more than one in two French people say they take sustainability into account in terms of savings. In particular, while 76% of them believe that the impact of their investments on environmental quality is an important issue, only 11% say they know exactly the different types of sustainable and responsible investments or similar.

To help them find their way through the jungle of financial products, the French state and the Ministry of Economy and Finance created the SRI label in 2016 to “make socially responsible investment products more visible to savers.” To receive this sesame, management companies or investment funds must invest their money in companies that meet the ESG criteria: environmental (E), social (S) and governance (G).

The impact of financial investment on the environment in which the French live is an important topic © AMF 2021 (via The Conversation)

The French SRI label now takes the place of choice. As of December 31, 2021, 749 funds with assets totaling 693 billion euros have received this status. For 2021, these funds show a combined collection of more than 81 billion euros.

New regulation in the EU

Despite this success, a news release on France 2 exposed the findings of the General Inspectorate for Finance (IGF) report on the SRI label to the general public. He is accused of making “a confusing promise to the savior” that could “cause misunderstandings”. Bersi’s experts add that without real reform, she exposes herself to “an inevitable loss of credibility and relevance.”

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Indirectly, there is, in particular, the problem of its compatibility with the new regulation of the European Union on the publication of information on sustainability in the financial services sector (Sustainable Finance Disclosure Statementor SFDR), which came into effect in March 2021.

This regulation defines three main categories of funds:

  • Article 6 (these funds do not include sustainable development goals);
  • Article 8 (these funds contribute to environmental and social performance);
  • Article 9 (these funds, the most environmentally friendly, are for sustainable investments).

This classification was developed for asset managers in order to determine, depending on the positioning of each fund, the requirements for reporting and communication with end customers, namely depositors. As such, it will be of limited use in helping clients validate funds against their specific ESG investment criteria.

Therefore, some asset managers may view the SFDR classification as a marketing opportunity to position their funds as environmentally friendly or ESG-focused. However, Article 8 is not intended to be a guarantee of quality, but there is a risk that asset managers will treat it as such.

Grading by levels

What’s more, “we’re already seeing smart little guys showcasing their ‘self-classification’ in article 9, visually enhancing it as if it were a label,” said Michel Pappalardo, president of the SRI Labeling Committee, in a recent interview. Bank overview. As such, many funds could be categorized as “Article 8 or 9”, especially since the imposed reporting and transparency obligations are not yet known to asset managers when the Level 2 SFDR requirements come into effect.

SRI Label poster campaign on buses © FIR and AFG

In other words, while these same commitments set transparency standards based on categories of funds, they are not intended to test shades of green or their sustainability. Moreover, there is a real risk that they will drown in the amount of information provided by the SFDR and not be able to make an informed investment decision.

At the same time, the recognition of the French label SRI, in particular, due to its seniority and number, makes it a relevant tool for investors and asset managers, subject to the transition to the gradation of levels recommended in the IGF report. .

Thus, our recent academic study focused on the relevance of the French SRI label as a tool for differentiating green investment strategies.

It examined the environmental performance of 380 European foundations over the period 2015-2020. based on six additional criteria widely used by professionals:

  • three are related to carbon emissions: overall level, carbon intensity (emissions compared to the amount invested by the fund in the company), carbon footprint (emissions compared to the company’s turnover);
  • three in relation to non-green energy consumption: overall level (net energy consumption of renewable energy production), energy intensity (net energy consumption compared to the amount invested by the fund in the company), energy footprint (net energy consumption in relation to the company’s turnover).

Grouping methods known as clusteringto divide funds into homogeneous groups (or clusters) in terms of environmental performance, measured based on the above criteria.

Current standards are not designed to evaluate shades of green © Gotcredit / Flickr, CC BY-SA (via The Conversation)

The results show that the most beneficial dark green group of funds (or cluster) is the most homogeneous and covers approximately 34% of the labeled funds in 2020, i.e. approximately the corresponding share of funds classified under Article 9 (36%).

The light green, slightly less virtuous cluster concentrates about 50% of funds in 2020. It is very heterogeneous due to the fact that the funds included in it follow an investment approach best in classfavoring the prospect of diversifying carbon risks with more assets in the portfolio, in particular the large capitalization of the French stock market.

Finally, the brown cluster, the least virtuous, concerns 16% of funds, much higher than Article 6 funds (3.2%) that do not have stated environmental and sustainability goals. Even if this last figure is somewhat tempting greenwashing managers, however, there is a real trend towards decarbonization of funds: the share of the green cluster is twice as high at the end of 2020 compared to the end of 2015, and the share of funds held by the brown cluster has halved between 2015 and 2020.

Another observable phenomenon is that funds with a global or non-European investment world are 1.5 times more likely to fall into the green cluster than funds with a purely European investment world.

Taken globally, these results show the importance of dividing SRI markings into four levels to distinguish between their green character, i.e. one is called dark green, two is light green and one is brown, which is fully compatible with Articles 9, 8 and 6 SFDRs respectively.

Thus, the SRI label will become a really important tool for both the producer (asset manager) and the end consumer (savers) to distinguish green investments from brown investments, which are less environmentally friendly.

This analysis was written by Yves Rannou, Research Lecturer in Finance at Groupe ESC Clermont; Mathieu Mercadier, Associate Professor of Machine Learning and Finance at Groupe ESC Clermont; Mohamed Amin Boutabba, Lecturer in Economics at the University of Evry – Paris-Saclay University.
The original article is published on the site
Talk.

Declaration of interest
● Yves Rannau received funding from the CleRMa laboratory (Clermont Research Management), of which he is a member, for this study under the label French SRI.

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