This article is one in a series of thought leadership pieces written for Responsible Investor by members of the European Commission’s High Level Expert Group on Sustainable Finance. To see other HLEG coverage, see here, or to comment, visit our discussion page.
The French responsible investment market has been a frontrunner with regards to ESG certification schemes. In 2009, Novethic launched the first SRI quality label, followed in 2012 by the first ‘green’ label; and last year, the French government launched two publics labels – also SRI and green.
In the aftermath of the 2008 global financial crisis, the financial industry was lacking definitions or regulation concerning responsible investment, and – as a result – more than 300 funds from more than 50 asset managers across Europe have applied for the Novethic labels since their launch.
The two public labels, the SRI label supported by the French Ministry of Finance (known from here onwards as ‘SRI’) and the green label supported by the Ministry of Environment (TEEC), are experiencing some difficulties in becoming game changers in the French responsible investment market. As of today, less than 20 asset managers have labelled a mere 80 SRI funds, and about 15 green labels have been awarded. Labelled products are a small part of a niche, known and used by the supply side, but unknown to many customers, individual savers or institutional investors. This is in sharp contrast to the capital needs required to finance Europe’s transition to a sustainable economy. Sustainable labels could be a key tool to mobilise assets: they offer the possibility to majorly drive investors towards sustainable finance if they can become a market signal of RI quality – as organic labels are for food products. That means sustainable financial products that are clearly invested in the best ESG-rated companies, building strong social and environmental business models associated with pertinent and standardised reporting. In order to become an efficient tool for investors, existing labelling schemes in France and other European countries need to be improved. It is necessary to take action on four pillars to build a strong European market for ‘High Impact’ responsible investment.
Step one: avoid confusion
In France, the creation of two labels carried by two ministries, with different methodologies, purposes and committees of evaluation, has not created the necessary momentum. The lack of marketing by public and private stakeholders doesn’t help either.In Europe, the diversity of initiatives at national level – also with different methodologies and requirements – reflects the diversity of responsible investment markets in each country. However, in the wake of the inclusive and ambitious certification initiatives in France and Germany (where they have the FNG label), there are already very promising schemes on which a common sustainable certification framework could be built. The latter would be placed under the leadership of EU Authorities and managed by an independent organisation funded by the EU and private sectors.
An EU Sustainable finance certification could have several layers:
- Certification of ESG integration into asset management
- Labels for products whose portfolios are invested at least 80% in sectors or activities that limit their negative ESG impacts and maximise their positive environmental and social impacts
- Thematic mentions: both green/clean economy and social benefits (or a combination)
Step two: ensure credibility
Self-assessment is a major risk for a label’s credibility. Audits done by an independent third-party are necessary to highlight the high quality of SRI financial products based on specifications designed by public authorities – as is the case for France’s green label. Public regulators can be key players in reinforcing label credibility. Through the definition of market standards, they will give end users guarantees on the funding of the transition towards a low-carbon economy.
During our discussions in the group, I experienced how difficult it can be to build a consensus on a green and sustainable European taxonomy for sectors. But I am convinced that it will be the best way to encourage business models and companies, and to challenge the usual big indexes as benchmarks of financial performance. If providers of labelling schemes add to sustainable labels explicit exclusions of weapons or nuclear activities, as it is for the French Green label and the German FNG Siegel, they will face strong resistance from the majority of asset management industry. But this resistance can be overcome if labels offer customers a guarantee to finance sustainable economy linked to a credible methodology, process and portfolio. This would prove that labelled sustainable products are trustworthy investment opportunities that are able to offer outperformance and a long-term perspective – keys of success for a financial product.
Step three: start promoting and marketing
High impact sustainable labels at European level could be promoted on a large scale if a significant number and variety of products are awarded and if they are associated with a strong and easily understandable methodology, audited by independent organisations. An ambitious marketing campaign, financed by public/private partnerships could be developed to show the high environmental and social impacts of labelled financial products. It should be associated with a strong public reporting framework and a public system of evaluation and traceability, which could be provided by Financial Market Authorities, and annual communication on the amounts invested in certified products and labels and the concrete impacts of these investments. This involves setting the objective of developing sustainable finance among the general public with communication campaigns financed by public-private partnership, with messages like ‘Giving meaning to your savings’ or ‘How to finance a resilient economy for Europe’ or ‘Fighting climate change with your savings’ etc.
Step four: organise massive distribution
Banks and insurance companies with SRI products sometimes hesitate to promote responsible investment on a large scale because they would have to create a new discussion with their customers about companies in their portfolios.They need to plan sales training so that their employees are able to explain sustainable investments – for instance, why one company is more sustainable than another; or why to exclude (or not) some companies or sectors. Labels could be a good way to summarise this discussion if they came become a sales tool with strong marketing and credibility.
This programme could be a promising project at EU level if it became an HLEG recommendation and was adopted by EU Commission and supported by regulation. I am fully aware that there is a long way to go. Nevertheless, I strongly believe that gathering European savers and institutional investors over the idea of financing sustainable economy could be a strong political message for the attractiveness and competitiveness of Europe.
Anne-Catherine Husson-Traore is the CEO of Novethic
To give feedback on the group’s interim report, published in July, see here.