Understanding the EU Sustainable Finance Regulation (3/4) - What is SGPB's “environmentally sustainable investment” approach?
In the first two articles of our series Understanding the EU Sustainable Finance Regulation, we looked at what the regulation sets out to achieve, and took a detailed look at the “global sustainable investment approach” — one of the three ways in which Societe Generale Private Banking’s investors can express their sustainability preferences. For our third article, we will unpack the second approach: the “environmentally sustainable investment approach”. Claire Douchy, Head of Corporate Commitments and Responsible Projects for Societe Generale Private Banking France, spoke to Diana Triana Cadena, Head of ESG Research at SG 29 Haussmann, the asset management company of Societe Generale in France, to get her expert input.
Claire Douchy: Since the implementation of MiFID II(1), financial intermediaries are now required to question their clients on their sustainability preferences. Can you give us a quick reminder of what that involves?
Diana Triana Cadena: There are two steps. First, our clients are asked by their banker or advisor to choose one of three sustainable investment profiles. Either the client has no sustainability preferences, or they would like a profile with predetermined sustainability preferences — the “generic SGPB” profile —, or they would like to personalise their profile to reflect their own sustainability preferences. If the client opts for the third profile, they move onto the second step where they choose one or more of the Private Bank’s sustainable investment approaches: “global sustainable investment”; “environmentally sustainable investment”; and “negative impact investment”.
Claire Douchy: Our focus today is the second approach, “environmentally sustainable investment”(2). What criteria need to be met for an economic activity to be considered environmentally sustainable?
Diana Triana Cadena: With the environmentally sustainable investment approach, the client chooses to invest in economic activities that are sustainable from a strictly environmental standpoint. This aligns with the “green activities” of the European Union’s “Green Taxonomy”: a system for classifying economic activities in order to identify, at the European level, those we can call environmentally sustainable. The regulation was tabled in 2018 and adopted in June 2020. To answer your question, four conditions must be met for an economic activity to be considered “green” or environmentally sustainable. First, it must make a substantial contribution to one of the following six environmental objectives: climate change mitigation; climate change adaptation; sustainable use and protection of water and marine resources; transition to a circular economy; pollution prevention and control; and protection and restoration of biodiversity and ecosystems. Second, it cannot cause significant harm to any of these objectives. Third, it must be carried out in a way that is respectful of employees and of human rights, particularly with respect to the United Nations Guiding Principles on Business and Human Rights. Fourth and final condition, it must comply with the very specific technical criteria set by the European Commission. So far, they are in place for the first two environmental objectives, which are climate change mitigation and climate change adaptation. The technical criteria for the remaining objectives are in progress.
Claire Douchy: Can we define these “green activities” simply on the basis of their actual impact on sustainable development?
Diana Triana Cadena: At this stage, it could mean businesses that do not worsen climate change or which contribute to mitigating its impact. This area will become clearer as the European Commission’s technical criteria for the four remaining environmental objectives I mentioned are published.
Claire Douchy: Can you give us a few examples of “green” activities?
Diana Triana Cadena: Take the energy sector. Only electricity that emits less than 100g of CO2 for each kilowatt hour generated is considered green. That immediately excludes fossil fuel-based power generation. Another example is cement production, which is considered green if its emissions are lower than 0.469 tonne CO2 per tonne of cement produced. Again, the technical criteria established by the Commission are very specific!
Claire Douchy: Do these technical criteria for the climate change mitigation and adaptation objectives cover all economic activities?
Diana Triana Cadena: No. At this stage they cover the 90 sectors that have the biggest impact on the climate, such as power and cement, as we saw in the examples, as well as transport and real estate.
Claire Douchy: Does that mean there are economic sectors that are not concerned by the European Commission’s criteria?
Diana Triana Cadena: That is correct. Some sectors have a low impact on the environmental objectives. Certain consumer sectors and the defence sectors, for example, are considered neutral in terms of “green” activities.
Claire Douchy: Let’s come back to the investor. If they are sensitive to sustainable development issues and choose to devote a portion of their wealth to green activities, what does that mean for their asset allocation?
Diana Triana Cadena: As you know, under our environmentally sustainable investment approach, the client chooses to align a percentage of their assets with the Green Taxonomy. This guarantees that they are investing in activities that contribute to mitigating or adapting to climate change.
Claire Douchy: Are all sustainable investment products required to disclose their portion of “green activities”?
Diana Triana Cadena: Yes, even if that portion is zero.
Claire Douchy: What does it mean when a sustainable investment product’s portion of “green activities” is zero?
Diana Triana Cadena: It could mean that the product’s investment approach does not explicitly target climate impact, or that the information on the portion of “green activities” of the underlying companies is not available. Keep in mind that the requirement for large corporations(3) to disclose the portion of “green activities” in their revenues only came into effect in 2023. Smaller companies are not required to disclose that information.
Claire Douchy: In your opinion, is it a good idea to invest most of your savings in green activities?
Diana Triana Cadena: To reiterate, there are still too few “green activities”, and they are by default limited to just a few sectors. Assets should not be allocated exclusively in such a high concentration of sectors. My advise would be to not invest everything in this way — at least not now where things currently stand.
Interested to know more? Read the other three articles of our series Understanding the EU Sustainable Finance Regulation:
What do they seek to achieve?
SGPB’s 3 sustainability investment approaches: “global sustainable investment”
SGPB’s 3 sustainability investment approaches: “negative impact investment”
... and 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 1, voting in MIF 2 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 : https://www.privatebanking.societegenerale.com/fileadmin/user_upload/SGPB/PDF/2023.06_-_Fiche_p%C3%A9dagogique_Finance_durable_VF.PDF)
(2) The two other approaches are covered in the articles: “environmentally sustainable investment”, and “negative impact investment”.
(3) Large corporations of over 500 employees with a balance sheet over €20 million, or more than €40 million in revenue.