Widespread distribution of SRI has begun across networks, but not without risk

Novethic discussed growth in the French sustainable funds market in the 2020 edition of Market Data, published on March 3rd. Assets under management increased by 66% between 2019 and 2020 and are expected to rapidly exceed €500 billion for nearly 1,000 sustainable funds. The PACTE Law provisions – which, since 2020, require life insurance providers to offer at least one certified fund (SRI, GreenFin, or Finansol) - have already boosted SRI labels. 486 SRI-labelled funds are available to individual investors, who have collectively invested more than €300 billion.

The majority are products with techniques for selecting companies on listed markets based on their ESG (Environmental, Social, and Governance) criteria ratings. But does this offer – originally designed by French management companies wishing to remain attached to major benchmarks - meet the demand of French investors?

According to the 2020 CPR AM barometer, 44% of respondents say they are ready to invest more than 30% of their savings in responsible investment, but 31% of them believe that the lack of information and impact indicators are significant obstacles. Ultimately, the top three priorities for French investors – in order of importance – are 1) respect and protection of the environment (which increased by ten points in 2020), 2) employment, and 3) education.

The fast-paced growth of thematic funds

Environmental thematic funds, which naturally meet these expectations, maintain steady growth. They increased by €25 billion in the second half of 2020 and have acquired roughly 15 additional products over this period. But the most striking phenomenon remains the development of low-carbon investment offers.

About fifty funds display climate added value. Half of them are target assets with a strategy for reducing carbon emissions. The other half focuses on climate trajectories and carbon neutrality commitments. The latter can be linked to the two climate indices launched as part of the European Union's sustainable finance action plan: the most stringent framework aligned with the Paris Agreement (PAB, Paris-Aligned Benchmark), and one focused on the transition to a low-carbon economy (CTB, Climate Transition Benchmark).

However, talking about the climate impact of a financial product is not without risk. German bank Deka recently went through a bitter experience. A consumer organization in Baden-Württemberg is suing the bank so that they remove the carbon impact calculator from its Deka-Sustainability Impact fund. According to this calculator, an investment of €10,000 in the fund translates to emission reductions the equivalent of a car’s diesel consumption over 3,597 km.

"This is a major source of confusion for the investor", explained the consumer organization, adding: "These are assessments made from models that do not take into account the reality of company practices in the portfolio".

Keeping promises to investors

Without going too far, the endpoint of a recent study by Epsor  – a specialist in employee savings plans on SRI-labeled funds  –  is also a red flag. It underlines the highly variable quality of SRI-labeled funds and the fact that clients' high environmental expectations are not reflected in the importance given to criteria of this type in company selection.

Even if March introduces new regulatory frameworks, such as compliance with AMF requirements and European reporting regulations (SFDR), sustainable fund marketing will face a major challenge: aligning funds with the promises made to investors. Misleading claims could stop the first phase of massive distribution of sustainable investment offers into banking and insurance networks at its inception. ■