Green finance

When the term "green finance" appeared a few years ago, there was a fear that it would be a fad and especially a "greenwashing" effect. However, France and the European Union have worked to ensure that sustainable criteria are no longer just values that need to be "shown", but rather characteristics that companies must demonstrate.

 

ESG criteria

The environmental, social and governance criteria (= ESG) allow us to classify a company in terms of its policy on the different environmental and social issues:

    ° The environmental criterion: takes into account the impact of the company on its environment (its capacity to manage its waste, to limit pollution).

    °  The social criterion: characterizes social dialogue, parity within the company and the well-being of employees.

    °   The governance criterion: ensures, among other things, the transparency of the company's management and the independence of the board of directors.

 

Responsible finance at the present time

At the national level :

The SRI label

The socially responsible investment label was created in 2015 by the Ministry of Economy and Finance. This label identifies funds that invest in companies with responsible practices in terms of ESG criteria.

In order to select companies, funds can choose between several approaches:

    ° Best-in-class approach: this approach consists of selecting the best-rated companies from an ESG point of view, for each sector of activity and without excluding any sector.

    ° Best-in-universe approach: the fund selects the best-rated companies on extra-financial criteria, all sectors included. The difference with the Best-in-class approach is that green sectors such as renewable energy will be over-represented compared to other less virtuous sectors.

    °  Best-effort approach: in this approach, the fund will select companies that show a real effort to improve their ESG performance. For example, a large retailer that seeks to reduce its waste.

    ° Sectoral exclusion: the fund will choose to exclude certain sectors that do not meet ESG criteria and where a significant part of its turnover comes from an environmentally harmful activity.

    ° Impact investing: this approach combines financial return with a real socio-environmental project. The investment will target companies that are often unlisted and have a social and/or environmental objective.

 

The Greenfin label

This label is the first created by France, it was founded in 2015 by the Ministry of Ecological Transition. The fund must meet several criteria set by decree, such as compliance with ESG criteria, investment in green projects and activities or the exclusion of certain sectors such as nuclear or fossil energy.

 

At the European level: a regulation that imposes more transparency

The sustainable finance disclosure regulation (SFDR)

The European SFDR regulation, which came into force on March 10, 2021, aims to provide more transparency in terms of environmental and social responsibility within the financial markets. The regulation applies to both investment funds and stock market products. The challenge is twofold, to classify actors according to their degree of sustainability and to clearly define the information that must be shared with investors. This regulation, which will be fully implemented by 2023, is a true European legal framework for sustainability and social and environmental issues in finance.

The regulation applies to all financial market players, both fund managers and issuers of stock market products.

From now on, these actors will have to demonstrate their environmental policy, in particular by communicating to investors the method used to respect ESG criteria, but also the means implemented to reach sustainability objectives.

Concerning the classification, the SFDR regulation provides for 3 categories to classify funds and investment products:

    ° Article 6: funds and investment products that have no sustainability objectives.

    ° Article 8: these funds and products will include ESG criteria but they are not the focus of their investments.

    ° Article 9: investment products and funds that have a genuine sustainable investment objective.

 

The European Taxonomy Regulation

This regulation came into force on July 12, 2020, in line with the SFDR regulation, it adds clarifications on the definition of a sustainable activity. The regulation concerns all market professionals, except those who display in their prospectus that the product in question has no positive impact on the environment.

The legislation sets out several criteria for defining sustainable activity, including contribution to environmental objectives, respect for fundamental labour rights and the absence, during the operation of the activity, of significant harm to environmental objectives.

The legal framework created between France and the European Union makes it possible to improve information on the degree of sustainability of financial products in order to direct financial flows towards truly sustainable investments while preventing "greenwashing".

It can be difficult to choose a sustainable investment among the multitude of products offered to you. Wealth A7 can assist you in this investment by selecting for you the investments that will meet your needs.

 

Where can I see green finance?

The different labels can be found in products such as equity, bond and diversified funds that will fit into PEA, securities accounts and even life insurance. The precursor products of sustainable finance were green bonds. This product corresponds to a loan issued on the market by a company or a public entity whose aim is to specifically finance initiatives related to the environment.

Since October 23, 2020, the SRI label can be awarded to real estate funds in return for strict criteria.

In concrete terms, ESG criteria are adapted to real estate:

   ° In the environmental field: the indicators will be the level of energy performance of buildings or the volume of greenhouse gases

   ° In the social field: we will look at the proximity of buildings to public transport, the quality of air and water inside the buildings

   ° In terms of governance: for example, transparency in terms of voting at general meetings will be required.

The objective of this label attributed to real estate is to increase the supply of new real estate, but especially to improve the existing stock. In order to reach their objectives, the management companies will have to impose a predefined methodology and will have to report regularly to the investors in a totally transparent way.

Green real estate can have many advantages and is part of a performance and quality approach, contact us to learn more!

 

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