Responsible & Sustainable Finance

“Finance is not merely about making money. It’s about achieving our deep goals and protecting the fruits of our labor. It’s about stewardship and, therefore, about achieving the good society.”. With this quote, Economist Robert J. Shiller denies all the statements that accuse finance people of being merciless, power-hungry, bottom-feeder people. Instead, it stands by the importance of finance in sustainable development as a cornerstone of impactful policies that achieve results and make the world a better place.

In fact, now more than ever, responsible finance has become a burning issue as it definitely needs to be addressed along with the related areas to ensure the future we so urgently need to build. The future in which everybody will have the chance to put his ding and succeed. The future that will empower us all as well as the next generations who will praise us and thank us for our remarkable efforts and results.

However, before diving deep into the importance of responsible finance in today’s world, I firmly believe that we should remove the thumb around responsible finance by defining it and showing clearly how it can be achieved, which the purpose and goal of this article.

According to the European Commission, sustainable finance refers to the process of taking environmental, social and governance (ESG) considerations into account when making investment decisions in the financial sector, leading to more long-term investments in sustainable economic activities and projects. Environmental considerations might include climate change mitigation and adaptation, as well as the environment more broadly, for instance the preservation of biodiversity, pollution prevention and the circular economy. Social considerations could refer to issues of inequality, inclusiveness, labor relations, investment in human capital and communities, as well as human rights issues. The governance of public and private institutions – including management structures, employee relations and executive remuneration – plays a fundamental role in ensuring the inclusion of social and environmental considerations in the decision-making process.

As a matter of fact, responsible finance can be achieved through sustainable investing that covers a range of activities, from putting cash into green energy projects to investing in companies that demonstrate social values such as social inclusion or good governance by having, for example, more women on their boards. More precisely, responsible finance consists of responsible investments that are based on the consideration of non-financial or “ESG” criteria, in addition to traditional financial criteria.

All these statements can make one wonder: how such investments can be achieved and more precisely, how to urge the different kind of investors to change their investing behaviors, especially if non-responsible investments can clearly seem way more lucrative?

Responsible investment can be carried out through a number of different approaches that may be used alone or combined. There are several types of funds to choose from:

• Exclusion funds take a negative approach through exclusion based on standards and sector restrictions. These funds aim to exclude from their investment universe any company that fails to comply with international agreements and standards, or that is involved in certain sensitive or controversial business sectors such as gambling, alcohol, arms, tobacco, nuclear, etc.
• ESG thematic funds allow for investment in specific sectors tied to sustainable development (waste treatment and recycling, renewable energy, health, etc.). They invest in issuers whose products or services help to generate benefits that are in line with the investment strategy.
• Sharing funds and solidarity funds aim to support social and community initiatives (social housing, microlending, integration through employment, etc.)
• “Best-in-class” funds select companies that demonstrate the best ESG practices within their business sector. This approach includes all business sectors.
• Impact investing funds focus on generating an environmental or social positive impact.
  

Furthermore, to help investors navigate the multitude of responsible and sustainable investments, labels have gradually emerged in order to guarantee the green, responsible or solidarity-based nature of investments. In Europe, numerous labels are recognized. The leading labels in terms of the number of funds labelled include the SRI label (France), FNG-Siegel (Germany, Austria, and Switzerland), LuxFlag ESG (Luxembourg), Towards Sustainability (Belgium), and Umwetlzeichen (Austria). Certain labels were created by financial markets, others by professional associations or by organizations specializing in environmental labelling.

Nevertheless, up until now France is the only country whose government has created and supported two public labels: the SRI label dedicated to Socially Responsible Investment, and the Greenfin label that targets environmental funds. The Finansol label is dedicated to solidarity-based finance. It should be noted that since the adoption of the PACTE Act, life insurance policies must integrate into their offer of investment vehicles at least one unit-linked product labelled a socially responsible investment (SRI), solidarity-based investment (Finansol) or green investment (Greenfin).

Finally, sustainable finance has a key role to play in the world’s sustainable development, and particularly in transition to net zero by channeling private money into carbon-neutral projects, says the European Union, for instance, whose Green Deal Investment Plan aims to raise $1.14 trillion to help pay the cost of making Europe net zero climate change emissions by 2050. To ensure that sustainable investments deliver on their promises, many crucially important decisions must be taken such as the one of Global Accounting Body: the International Financial Reporting Standards Foundation that has just set up the International Sustainability Standards Board to come up with new rules to validate sustainability claims.