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Responsible finance - Investing differently
Since 2020, moreover, the PACTE Act has encouraged investors to choose responsible investments when subscribing to life insurance policies.
But how are we to navigate all the different offers? What is Responsible Investment?
What is Responsible Investment (RI)?
Responsible investment is an investment based on the consideration of non-financial or “ESG” criteria, in addition to traditional financial criteria.
RI (Responsible Investment) comprises*:
- SRI Funds (Socially Responsible Investment), which the AFG and the FIR defined in 2013 as follows: “SRI is an investment that aims to combine economic performance and social and environmental impact by financing companies and public entities that contribute to sustainable development, regardless of their business sector. By influencing the governance and behaviour of financial actors, SRI promotes a responsible economy”;
- Funds that take other ESG approaches, such as ESG thematic funds, ESG criteria integration funds, exclusion funds, engagement funds, solidarity funds, and impact investing funds.
*Source AFG - Association Française de la Gestion financière (French asset management association)
* Establishing a dialogue with companies to encourage their progress in terms of ESG practices
Non-financial criteria are the basis of the non-financial analysis of a company. For example, the following criteria may be used for the respective E, S, and G components:
- Environment: focuses on analysing the capacity of companies to manage their direct and indirect impacts on the environment: greenhouse gas emissions, waste management, water consumption, natural resources, biodiversity;
- Social: aims to measure the manner in which the company carries out a strategy to develop its human capital. Covers two social aspects: the one linked to the company’s human capital, and the other linked to human rights in general (i.e., working conditions, non-discrimination, health and safety);
- Governance: the analysis of management structures, the independence of the Board of Directors, and the presence of audit committees. Is the Board of Directors diverse? Are the directors truly independent? What are the links between remuneration and performance? Reputation and e-reputation are also criteria to take into account.
Analysing companies with regard to these criteria allows us to identify those with the most virtuous practices from an ESG perspective and that contribute to a more responsible financing of the economy in the long term.
Responsible investment can be carried out through a number of different approaches that may be used alone or combined. There are several types of fund to choose from:
- Exclusion funds take a negative approach through exclusion based on standards and sector restrictions. These funds aim to exclude from their investment universe any company that fails to comply with international agreements and standards , or that is involved in certain sensitive or controversial business sectors such as gambling, alcohol, arms, tobacco, nuclear, etc.
- ESG thematic funds allow for investment in specific sectors tied to sustainable development (waste treatment and recycling, renewable energy, health, etc.). They invest in issuers whose products or services help to generate benefits that are in line with the investment strategy.
- Sharing funds and solidarity funds aim to support social and community initiatives (social housing, microlending, integration through employment, etc.)
- “Best-in-class” funds select companies that demonstrate the best ESG practices within their business sector. This approach includes all business sectors.
- Impact investing funds focus on generating an environmental or social positive impact.
To help investors navigate the multitude of responsible and sustainable investments, labels have gradually emerged in order to guarantee the green, responsible or solidarity-based nature of investments.
In Europe, numerous labels are recognised. The leading labels in terms of the number of funds labelled include the SRI label (France), FNG-Siegel (Germany, Austria, and Switzerland), LuxFlag ESG (Luxembourg), Towards Sustainability (Belgium), and Umwetlzeichen (Austria). Certain labels were created by financial markets, others by professional associations or by organisations specializing in environmental labelling.
France is the only country whose government has created and supported two public labels: the SRI label dedicated to Socially Responsible Investment, and the Greenfin label that targets environmental funds. The Finansol label is dedicated to solidarity-based finance. It should be noted that since the adoption of the PACTE Act, life insurance policies must integrate into their offer of investment vehicles at least one unit-linked product labelled a socially responsible investment (SRI), solidarity-based investment (Finansol) or green investment (Greenfin).
The SRI label
Created in 2016 and supported by the Ministry of Finance, this label is awarded for a period of three years and may be renewed. Controls are also carried out during this period in order to ensure that the fund continues to meet all the criteria.
A set of guidelines defines these eligibility criteria, including the required information and the methods for controlling compliance with the criteria. It will be updated as needed to strengthen requirements.
It should be noted, moreover, that a new set of guidelines for the label has been applicable since 23/10/2020.
» SRI in two figures
514 products awarded an SRI label for a total of €259 billion in outstandings at 30/09/2020. (Source : Novethic)
» Awarding of labels
A fund that wishes to be awarded a label must send its request to one of the three bodies accredited by COFRAC (French Accreditation Committee): Afnor Certification, EY France, and Deloitte since 2020.
The process involves three phases:
- Verification of eligibility with regard to the guidelines: the fund provides a description of the nature and composition of the portfolio;
- Audit based on the labelling criteria per the guidelines, focusing on six themes;
- Signing up to an official list maintained by the Ministry of the Economy, Finance and Recovery.
» The six themes
- The objectives sought by the fund or the mandate by taking into account ESG criteria for issuers.
- Methodology of analysis and rating of issuers used by the portfolio management company (or methodology of analysis and rating of real estate assets used by the portfolio management company for real estate funds).
- Taking ESG criteria into account in the construction and life of the portfolio.
- The ESG commitment policy (dialogue and vote) with issuers (or the ESG commitment policy vis-à-vis key stakeholders for real estate funds).
- Strengthened transparency.
- Highlighted monitoring of ESG performances of the fund portfolio.
Source : Afnor
The Greenfin label
The Greenfin label was created at the end of 2015 by the Ministry for the Ecological Transition, to guarantee the transparency and environmental commitments of financial products. It awards labels to investments that take into account the environmental and energy transition and therefore excludes companies operating in the nuclear and fossil fuel sectors.
Three organisations have been accredited for this label: Novethic, EY France and Afnor certification.
Like the SRI label, the process for awarding this label involves three phases:
- Verification that the fund is eligible for the Greenfin label;
- Audit based on labelling criteria, broken down into four categories;
- Awarding of the label.
Find out more: Greenfin label
The Finansol label
The label was created in 1997 by Finansol, a non-profit association under the 1901 law, to distinguish solidarity-based savings products from other savings products. It offers investors the guarantee that they are investing in activities with an important social and/or environmental value, such as access to employment and housing for persons in difficulty, support for organic farming and renewable energy, or entrepreneurship in developing countries.
Find out more:
- The origin of the notion of sustainable development
- Corporate Social Responsibility
- Responsible investment (RI)
- Declaration of non-financial performance
- Responsible Investment is not concrete
- Responsible investment is less profitable than a traditional investment
- Responsible Investment is just a trend
- Responsible investment has no impact