Understanding the EU Sustainable Finance Regulation (4/4) - What is SGPB's the “negative impact investment” approach?
Our article series Understanding the EU Sustainable Finance Regulation has so far examined what the regulation sets out to achieve, and explored two of SGPB’s three approaches for its clients to express their sustainable investment preferences. We end the series with this interview dedicated to the third approach: the "negative impact” investment approach. Our expert, Claire Douchy, Head of Corporate Commitments and Responsible Projects for Societe Generale Private Banking France, spoke to Julie Berenguier, Director of Investment and Partnership Development at Societe Generale Private Banking .
Claire Douchy: Julie, can you remind us why investors are being invited to express their sustainable investment preferences?
Julie Berenguier: Since the implementation of the mandatory questionnaire resulting from MiFID II(1), clients must provide their preferences on sustainable investment. At Societe Generale Private Banking, the client starts by selecting one of three profiles: no sustainability preferences; sustainability preferences but opting for predetermined preferences via the “SGPB generic profile”; or sustainability preferences but of the client’s choosing. With the third, personalised profile, the client will need to specify their preferences. To this end, SGPB offers a choice of one or more of its three sustainable investment approaches: “global sustainable investment”; “environmentally sustainable investment”; and “negative impact investment”.
Claire Douchy: Today we here to talk about the third approach: “negative impact investment”. Can you tell us more?
Julie Berenguier: The notion of “negative impact” originates from the regulatory principle, introduced by SFDR(2), of “double materiality” — i.e. the reciprocal impacts between companies and their social and natural environment. We therefore consider the negative impacts the company can have on its social and natural environment, and the impacts the social and natural environment can have on the company. Let me give you a few examples. As sea levels rise, a company with coastal infrastructure could find itself unable to operate. In farming or in construction, excessive heat can make it impossible to work outdoors, which affects productivity. From a regulatory standpoint, the hardening of legislation concerning fossil fuels can wipe out the estimated value of an oil deposit, making it what in finance is called a stranded asset. As the examples show, the environment can have a significant impact on companies. Equally, companies in the chemicals sector can have a disastrous impact on nearby ground water if it does not have strict pollution control policies in place. In this case, the company has a significant impact on the environment, jeopardising water resources. There can also be labour impacts, should a company have little regard for the working conditions of their subcontractors. Here it is a question of decent work. All these examples demonstrate one thing: either way you look at it, negative impacts are measured against one or more sustainable development issues.
Claire Douchy: Let’s come back to our clients. What does a “negative impact investment” approach mean to them?
Julie Berenguier: For clients, it means identifying the sustainability issues whose negative impacts they'd like to reduce using their investments.
Claire Douchy: Can you expand on these issues?
Julie Berenguier: There are many, but SGPB suggests seven categories of issues: compliance with standards on controversial weapons, like biological weapons; compliance with minimum social standards, labour laws and sound corporate governance; compliance with gender equality; reduction of waste and polluting emissions; protect biodiversity and aquatic/terrestrial life; and finally, sustainable management of water resources and raw materials.
Claire Douchy: What are some examples of negative impacts where the client can act through their investments?
Julie Berenguier: Going back to my earlier examples, a chemical company that does not manage its waste has a negative impact on the issue of “sustainable management of water resources and raw materials”. And the productivity-focused company with little regard for its employees has a negative impact on the issue of “compliance with minimum social standards, labour laws”. If the client is particularly sensitive to these issues, their savings will not be invested in such companies.
Claire Douchy: How about a few examples of how the suggested categories reduce negative impacts?
Julie Berenguier: Say a client wants to use their investments to help reduce CO2 emissions. We can offer them financial products that require the underlying companies being in invested in have a policy in place to manage and reduce their CO2 emissions. These products avoid companies that do not have such policies in place. Some sustainable financial products commit to helping to reduce the negative impacts on multiple issues: this implies that the companies they invest in have been closely scrutinised, and that companies that have not established risk-prevention policies on the issues in question will be avoided.
Claire Douchy: Are there any products committed to reducing negative impacts on all sustainable development issues?
Julie Berenguier: Not yet. Fund managers need accurate and detailed information on all the issues they want to support, with quantified indicators on the underlying companies, before they can commit to reducing the negative impacts of their investments. At present, not all companies are reporting detailed, quantified information on the progress being made in sustainable issues, like biodiversity and natural resources. We hope that the market will make progress in this area.
Claire Douchy: Do you think it is wise for investors to defend some issues more than others in their approach?
Julie Berenguier: Currently, the most mature indicators under the “negative impact investment” approach are compliance with international standards, and climate issues — including CO2 emissions.
Interested to know more? Read the next three articles of our series Understanding the EU Sustainable Finance Regulation:
What does it seek to achieve?
SGBP’s 3 sustainable investment approaches: what is the “global sustainable investment” approach?
SGBP’s 3 sustainable investment approaches: what is the “environmentally sustainable investment” approach?
... and feel free to contact your Private Banker for more information.
(1) MiF I (Markets in Financial Instruments) is a European directive adopted in 2004 and applied in 2007. A regulatory framework of the financial markets, it enforces the investment service providers to classify and inform clients. After the 2008 financial crisis, the European Commission decided to review MiF I, voting in MIF II in 2014. The purpose of the updated directive is to protect individual investors as well as improve the transparency, security, and operation of the financial markets. (Source : www.privatebanking.societegenerale.com/fileadmin/user_upload/SGPB/PDF/2023.06_-_Fiche_p%C3%A9dagogique_Finance_durable_VF.PDF)
(2) The Sustainable Finance Disclosure Regulation (SFDR) is a European regulation aimed at improving transparency related to environmental and social responsibility on the financial markets. Under the SFDR, all products must be classified according to their sustainability characteristics.
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