Three essential questions to navigating the jungle of sustainable finance labels

Sustainable finance labels provide valuable insights for investors seeking to manage their money more responsibly. However, there are significant disparities between many European sustainable finance labels, which makes it difficult to understand their true impact. To better understand this impact, Novethic has reviewed all of these labels in a recent study.

@PascalGuyot
European labels on sustainable finance should help direct saving trends towards more responsible investments.

Labels certified as sustainable financial products have multiplied in Europe in recent years. From the SRI and Greenfin labels in France, FNG-Siegel in Germany, Austria and Switzerland, Febelfin standard in Belgium, Umweltzeichen in Austria, Nordic Swan Ecolabel in the Nordic countries, and the three LuxFLAG labels in Luxembourg, it is increasingly difficult for investors looking for more sustainable products to navigate between these various terminologies.

Novethic has analyzed eight European labels and the Belgian label standard to study each label’s mode of operation. In its most recent study, "Panorama of European Sustainable Finance Labels", Novethic (a Greenfin label auditor) highlights methodological disparities to help responsible investors navigate their way through the many labels on the market.

What financial weight do these labels hold?

This is still a niche market. A little more than 400 investment funds have received a sustainable finance label, out of nearly 60,000 existing funds on the European market. These funds represent less than €100 billion in assets under management, i.e. 1% of all European assets under management.

These labels should, however, contribute to a better understanding of sustainable finance by citizen investors. According to a recent study by Deloitte, 61% of these investors rely on labels to make sure their investments are responsible. It is therefore necessary that these labelled funds are visible and understandable.

The recently adopted Pacte Law (Business Growth and Transformation Plan) is expected to accelerate labelled funds. One of its provisions requires life insurers to offer at least one SRI account unit by 2020 and three SRI account units (Greenfin or Finansol) by 2022.

What promise are these labels expected to deliver?

The nine schemes studied by Novethic propose two different approaches. "These labels provide a guarantee that the most controversial companies will not be included in the portfolio and, for green labels, the funds do not invest in fossil fuels and nuclear energy," says Nicolas Redon, expert in green finance at Novethic.

Four labels claim to be "green" (LuxFLAG climate finance, LuxFLAG Environment, Greenfin label and Nordic Swan Ecolabel), with a stronger positive impact on the climate. In addition to excluding fossil fuels from their investment universes, they require investing in climate friendly companies. For example, LuxFLAG Climate Finance imposes a minimum green turnover threshold of 37.5%.

The other labels ensure that the funds respect an environmental, social and governance (ESG) criteria analysis of all holdings. Four of these ESG labels (FNG-Siegel, Nordic Swan Ecolabel, Umweltzeichen and Febelfin) have the added exclusion of economic sectors such as arms, tobacco, GMOs, and companies violating fundamental rights.

How do French labels compare to their European counterparts?

France has opted for two different labels, reflecting the two distinct approaches between green and ESG labels. The SRI label is one of the most widely used in Europe, accounting for nearly half of the €100 billion in assets under management. Recently launched in 2015, the Greenfin label, or the new name for the TEEC (Energy and Ecological Transition for the Climate) label, audits 11 listed funds with €2.55 billion in assets under management, and an additional 19 unlisted funds for a total of nearly €4.5 billion in managed assets.

The Greenfin label refers to eight "eco-sectors" to determine the “green” part of the investment (renewable energy, energy efficiency, green buildings, sustainable mobility, etc.). "The GreenFin label is the one that most allows us to prepare for the European classification system,” affirms Nicolas Redon, “It the most reflective on what constitutes an eco-activity."

This type of classification will be the next step for investors. The European Commission wants to give more clarity to sustainable finance and plans to create a new category of ecolabels for financial products in the coming months.

Arnaud Dumas @ADumas5