The tools of sustainable finance

The tools of sustainable finance

With climate change, finance and other economic sectors have no choice but to become sustainable. But with what tools?

What is sustainable finance for?

There are different definitions of sustainable finance. In this article we will remember the one that goes straight to the point:

Sustainable fi nance refers, for the most part, to all instruments and mechanisms for fi nancing sustainable development.

Finance has the public image of a soulless entity motivated exclusively by profitability criteria. Let’s be a bit iconoclastic: it is this purely rationalist vision that is its strength in the context that interests us … from the moment when the “extra-financial” criteria 1 : human costs, environmental costs are correctly reintegrated into profitability studies long-term.

This is precisely what is happening, driven by institutional investors such as insurance companies. Here is what Henri de Castries, CEO of Axa, says:

“We have no choice: a world at + 2 ° C could still be insurable, a world at + 4 ° C certainly would not be. “

Sustainable finance, finance of candies intended to satisfy the demand for some boos to calm their conscience by placing their money in an “ethical” and “responsible” way, it’s over. The role of finance is to optimize the allocation of available savings towards financing needs . From now on the environmental aspects will be part of the criteria of optimality.    

It also means that finance should no longer be seen as an enemy of sustainable development but as a powerful means to facilitate the energy transition … provided however that the right tools are targeted, because it is true that the tools of sustainable finance continue to coexist with those of “classical” finance.

Evaluating issuers: SRI labels and sustainable indices

Give Medals: SRI Labels

Here are already two acronyms: ESG criteria – Environmental, Societal and Governance – and SRI: Socially Responsible Investment. SRI is for an asset manager to include the ESG criteria in the issuer selection process.

Note the extra-financial character and therefore intrinsically unmeasurable – and claimed as such –  selection criteria (impact on the environment, social policy, governance). On the other hand, the mix of ethical, social and environmental criteria undermines readability for the investor. The recent (November 2015) report of the AMF on socially responsible investment in collective management does not fail to emphasize the “polymorphic and difficult to apprehend” nature of the approach. Especially since the coexistence of SRI funds and “classic” funds in management companies’ offer questions: what is the share of the genuinely socially responsible approach compared to purely marketing tactics, in short “greenwashing”? ? However, let’s not forget that “hypocrisy is a tribute that vice makes to virtue”! 2

In order to see more clearly, it is possible to rely on an external source such as Novethic . Novethic awards an SRI fund label to UCITS taking into account ESG criteria in their selection of portfolio issuers. This label makes it possible to attest that the SRI approach is not only accessory in the management of the portfolio.

SRI uses different methods of issuer selection, the best known being the best-in-class approach. This is to recognize that while it is not possible to totally exclude certain controversial issuers, at least in each sector they are the “best-known”   (or least bad)   in environmental, social and governance terms. who were selected.

Maintaining healthy emulation: sustainable indices

This “best-seller” approach is that of “sustainable indices” such as the Dow Jones Sustainability Index (DJSI). To create these indices, because there are several, their promoter RobecoSAM conducts an annual review of the 3400 largest global companies on the basis of extremely detailed ESG criteria. The methodology and results are presented in detail at http://www.sustainability-indices.com/ .

Regarding the environmental criteria, the questionnaire insists on the transparency of the company in this area, and on the presence of quantified indicators allowing it to evaluate its environmental impact.

As the index is made from the “best bid” in each category, the approach maintains a healthy competition among the largest emitters 3 world, who are encouraged to fight to get into the index, then for s’ keep it there. Note that Volkswagen was removed from the index in October 2015, without waiting for the annual review whose results have just been published!

The European equivalent is proposed by Vigeo, which applies a similar method. Vigeo is also a rating agency that measures the ESG performance of companies, governments and public bodies. There is also a special carbon index, the “Low Carbon 100 Europe”, developed by Euronext.

Financing green growth: green bonds

Green bonds allow investors to finance projects or activities of companies, local authorities or international organizations generating a direct environmental benefit  : renewable energies, energy efficiency, adaptation to climate change … Issuers adhere the Green Bond Principles, by which they undertake to inform investors about the “green” use of the funds raised, not only in the issue prospectus life of the obligation.

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