European sustainable finance: what do you need to know at this stage?
On April 22, 2021, on the occasion of International Earth Day, the United States organized an international climate summit that was described as decisive, with over 40 states present and major commitments made. In this field, Europe is a leader with its "Green Deal" or European Green Pact, unveiled in December 2019. As part of this Green Pact, the Commission announced on 14 July that it had adopted a series of "proposals aimed at adapting the EU's climate and energy policies, transport and taxation with a view to from reduce net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels(1)". Previously, European regulations have been adopted to reinforce the transparency of financial products with regard to the inclusion of environmental and social criteria. Diana Paola Triana Cadena, Head of ESG (Environment, Social, Governance) risk monitoring at SG29 Haussmann, the portfolio management company dedicated to Societe Generale Private Banking in France, tells us more...
Claire Douchy: Before we look at how Europe is articulating these texts, let's first look at the two important notions they define: "sustainability risks" and "negative impacts on sustainability"...
Diana Paola Triana Cadena: Sustainability risk is defined as an environmental, social or governance event or condition that, if it occurs, could have a material adverse effect on the value of the investment. Sustainability factors include: in the environmental area, greenhouse gas ("GHG") emissions, biodiversity, water, waste; in the social and governance area, international companies' consideration of the United Nations Global Compact(2), the gender pay gap, diversity in governance bodies and exposure to controversial weapons(3) Sustainability risks can have a significant negative impact, potential or actual, on the value of an investment. Conversely, an investment decision can have a negative impact on sustainability.
Claire Douchy: This set of European regulatory measures is one of the most ambitious projects in the world to encourage players in the financial value chain to integrate sustainability and climate change considerations into their activities. What does it cover specifically?
Diana Paola Triana Cadena: It includes four major regulations that must be implemented between March 2021 and mid 2022: the first text to be implemented on March 10 is the SFDR "Sustainable Finance Disclosure Regulation"(4) on non-financial information provided by financial actors. The other three cover firstly the taxonomy regulation, which is a classification tool to consider whether an economic activity is "green" or "sustainable", then the "benchmark" regulation which created financial indices in line with the climate transition or in line with the alignment with the Paris agreements(5) and finally the regulation on the knowledge of customers' preferences with regard to sustainable investments to enable them to invest in savings products in line with their objectives.
Claire Douchy: Can you tell us more about the Sustainable Finance Disclosure Regulation (SFDR), which aims to promote the transparency of sustainable financial products distributed in Europe?
Diana Paola Triana Cadena:This regulation introduced new obligations and common reporting standards for asset management companies and financial advisors. These financial actors are now required to present on their website how they integrate sustainability risks into their investment or product selection processes and how they manage the negative impacts of the selected investments and products on sustainability (greenhouse gases, poor waste management by companies, etc.). In this context, as a financial player concerned by this regulation we have also updated our marketing and pre-contractual information documents for our clients.
Claire Douchy: Can you give us an example of how SG 29 Haussmann integrates sustainability risk management?
Diana Paola Triana Cadena: Let's take the emblematic example of Volkswagen and the "Diesel Gate" scandal. When it was revealed, the Volkswagen group saw its ESG controversy rating rise to Red, i.e. "very severe"(6), as the scandal revealed a serious governance flaw. At the same time, the company's share price fell sharply. For Société Générale Private Banking and its affiliated management companies (SG29 Haussmann and SGPWM-Société Générale Private Wealth Management), this level of Red controversy is a cause for immediate exclusion from portfolios and, more generally, from the universe of securities in which to invest. Of course, this exclusion is not definitive, and the company may be reinstated in the universe of stocks on which managers and advisors can take positions once its level of controversy has been positively reviewed. Other examples can be found in the environmental field: a company in the chemical sector, for example, that has poor waste management, is exposed to very severe controversies because if the risk occurs, it will have a strong impact on the share price. Excluding companies with the most severe ESG controversies from the investment universe is one way in which we integrate sustainability risk.
Claire Douchy: Do you have an example of a negative impact on the sustainability factors of your investment policy?
Diana Paola Triana Cadena: Yes, for example, in the area of global warming and CO2 emissions. We look closely at the level of direct and indirect CO2 emissions of the companies in the portfolios we manage. Not all companies in the same sector emit the same amount of greenhouse gases. My role as risk controller is to check that the aggregate emissions at the portfolio level are lower than those of the portfolio's benchmark index, provided, of course, that this corresponds to the management objective; this is the case for all our portfolios that have the SRI (socially responsible investment) label. It is our responsibility to ensure that our management choices have the least harmful effects on the climate.
(2) The United Nations Global Compact asks companies to align their strategies and operations with ten universal principles related to human rights, labour, the environment and anti-corruption.
(3) Controversial weapons include various types of weapons prohibited by international conventions or European Union regulations, such as certain cluster munitions, anti-personnel mines, biological or toxin weapons, chemical weapons and depleted uranium mines.
(4) SFDR: Sustainable Finance Disclosure Regulation.
(5) The Paris Climate Agreement: at COP21, 195 states signed the Paris Agreement to keep the global temperature increase to 1.5°C by 2100 "compared to pre-industrial levels" and to achieve carbon neutrality by 2050.
(6) Controversy scale: Red=existence of a recent or ongoing very severe ESG dispute (or controversy), Orange=existence of one or more recent or ongoing severe ESG disputes, Yellow=existence of a reportable ESG dispute, Green = few or no ESG disputes.
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