Published on 24 April 2019

SUSTAINABLE FINANCE

Responsible investment could mean a crash test for the mass market

Responsible investing is growing at a rapid pace and is beginning to intertwine with the rest of the finance sector. The challenge is far from being won. Disparity in terminology makes it particularly difficult for investors and salespeople to market it. And lack of standardization concerning impact measures threatens to undermine end-customer trust.

 

 

écolabel européen pogonici
The clarity of responsible investment offers will be crucial in order for investors to take part.
@Pogonici

Driven by new regulations and new expectations, responsible investment is becoming more widespread. But this new product is attempting to win over the market with an offer that could leave customers and the salespeople responsible for its spread through banking networks quite confused.

At its start in the early 2000s, responsible investment was a business for financial professionals with management companies that offered SRI products to institutional investors. This allowed for a certain level complexity in business practices and in vocabulary in order to present the process of ESG integration criteria in asset management to actors who spoke the same language.

Confusion surrounding unofficial terminology

With the creation of two public labels (SRI and TEEC) in 2016, France wanted to give itself the means to broaden the diffusion of financial products that do not only seek financial performance but environmental and social performance as well.

First, The European Action Plan on Sustainable Finance, and then the French Pacte Law, propelled the phenomenon by focusing on the end-customer. Through these efforts, life insurance products will answer to environmental and social criteria, and benefit from labels. Distributors and their account managers will therefore need to explain to investors, in simple terms, what these new types of investment actually correspond to. This is a considerable challenge as 65% of French respondents at the Forum for Responsible Investment in autumn 2018, had never heard of SRI...

Of the approximately 500 funds distributed in France claiming sustainable finance, just over 200 have an SRI label. But under the same label, the products display terms as varied as "sustainable", "responsible", "high-impact", "ESG" or even "SRI"! To top it off, in about 50 cases, these are thematic funds that are only able to invest in the environment.

To help customers see more clearly, Aviva has taken a gamble in launching a strong campaign message: life insurance is about respecting the environment, human rights and facilitating access to employment. They’ve relied on strong pledges to demonstrate to clients how the portfolio companies of its 25 SRI-labelled products contribute to creating economic, environmental and social value.

Standardization and Impact Measurement: The Next SRI Challenges

The simplest way seems to be the impact indicators. Today left to the free choice of the management companies who want to obtain a label, they flourish in dissonance. This makes it difficult to understand the impact of the financial product and almost impossible to compare several funds on impact criteria. In addition, the existing indicators are mainly climate-based, where companies provide the most data to calculate how much greenhouse gas emissions they are reducing or avoiding.

To make things even more complex, very large asset management companies such as Amundi, AXA IM, and more recently BNP Paribas AM, have announced that they are extending ESG criteria to the entirety of their assets under management - and therefore to all their products - with a timeframe from 2019 to 2021. They are, thus, making sustainable finance a market standard and no longer just the sum of products labelled as such. However, here again, the desired mechanisms vary in their level of ambition and capacity for transformation.

Backed by major banking and insurance groups, these management companies will be able to massively distribute financial products to their customers with promises to fund the fight against climate change or environmental protection. It will then be necessary to explain how the companies in the portfolio contribute to these objectives, at the risk of being accused of "green" or "social" washing.

The generalization of SRI-labelled funds, as well as green and solidarity funds, is expected in 2022. This leaves two short years to refine impact assessment methodologies and standardize indicators…very little time.

Anne-Catherine Husson-Traore, @AC_HT, CEO of Novethic

Find the last datas of SRI market on Novethic.fr (in french)


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