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No, it is not, as sustainable investments play an important role in the transition to a more sustainable world. In order to meet the international objectives in relation to sustainable development, such as a better climate and environment protection, huge investments of several billion euros are necessary. Thus, more and more financial products complying with the sustainability requirements set by the European Union are being offered.
Gilles Klein from the CSSF explains in an interview how we can find out if a financial product is sustainable, what is meant by “greenwashing” and what needs to be considered when investing in sustainable products.
The EU sustainable finance framework
The transition towards a more sustainable world requires significant financial investments, hence the importance of the sustainable finance topic. The EU has taken measures in the context of sustainable finance to increase the credibility of sustainable finance and to ensure greater transparency for investors.
Therefore, the EU set up a list of environmentally sustainable economic activities, referred to as taxonomy. This taxonomy allows companies, investors and policymakers to share a common definition of environmental sustainability. The taxonomy pursues 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;
- Protection and restoration of biodiversity and ecosystems.
Moreover, the EU imposes transparency rules on financial market players in order to improve information on the financial products’ sustainability degree. This allows addressing greenwashing and channelling investments to truly sustainable investments. Financial service providers also have the obligation to specify whether an investment takes into account the main negative impacts (such as greenhouse gas emissions, water pollution, forced labour, etc.) and, where applicable, to indicate what is done to mitigate these impacts.
Moreover, the EU sustainable finance framework includes benchmarks, standards and labels. These tools are expected to shift investment flows to more sustainable activities and business models and to provide investors with more transparency in this area.
The role of the CSSF with respect to sustainable finance
The CSSF, as a regulator, supports the supervised entities in order to actively guide the financial sector in integrating the ESG factors. It ensures an effective implementation of the regulations with a risk-based supervisory approach. Moreover, as part of its financial education duty, the CSSF assists consumers in their reflections and increasing awareness related to financial sustainability matters.
I am interested in sustainable financial investments, what should I do?
It is essential for investors to become familiar with the issue and to find out what sustainability means for them. This assessment may vary depending on the points of view and personal convictions of each investor. While, for some people, climate neutrality of the activities is a major argument, for others, a fair and socially just manufacturing process is decisive. Hence the importance of thinking about one’s own targets when investing in sustainable products.
Since August 2022, the financial sector professionals are required to assess the sustainability preferences of their clients, i.e. their clients’ wishes on sustainable investment. The assessment of the clients’ preferences regarding sustainability must allow financial advisers and investment managers to recommend investments that meet their clients’ investment profile.
How can I make sure that a product is really sustainable?
Once the personal sustainability targets are clear, the investment offers should be analysed with a particular emphasis on the following aspects:
- Which sustainability objectives are specifically mentioned?
- Which criteria has been used to measure sustainability (is the product sustainable in general or only in comparison to similar products)?
- Have other sustainability targets that are important to me been neglected (as, for example, climate-neutral manufacturing but inappropriate working conditions)?
- What evidence is provided to prove that sustainability targets are effectively reached?
- Can this evidence be verified? Has the achievement of sustainability targets been confirmed by an independent body?
It is essential to ask the right questions and not to be seduced by words such as “sustainable”, “ESG” or “green”.
As for any investment, it is important to gather information beforehand and to ask for advice from professionals.
ESG criteria
The ESG criteria are composed of 3 categories:
environmental criteria (E), which take into account the impact of the companiesu2019 activities on the environment: in terms of carbon emissions, biodiversity protection, pollution, etc.
social criteria (S) which assess the human impact, i.e. they focus on the companyu2019s employees, their competences, working conditions, etc. and analyse the impacts on the company as a whole, including clients and suppliers.
governance criteria (G), ensuring the independence of the organisation and compliance with its obligations with respect to the rules that govern the way in which the companies are managed and controlled: independence of the Board, transparency of the remuneration of the managers, anti-corruption actions, conflicts of interest, ethical and deontological rules, etc.
These criteria taken as a whole allow assessing the companiesu2019 ability to act responsibly with respect to the environment and their stakeholders, be they employees, partners, subcontractors or clients, and with respect to the society, thereby tying their financial performance to their impact in environment, social and societal terms.
EU taxonomy for sustainable activities
The EU taxonomy is a classification system establishing a list of environmentally sustainable economic activities. The taxonomy provides companies, investors and policymakers with appropriate definitions of economic activities that may be considered as environmentally sustainable. The objective is to create investor security by protecting them against greenwashing, assist companies in becoming more climate-friendly, mitigate market fragmentation and assist in directing investments where they are most needed.
Greenwashing
Greenwashing is the attempt to portray products as more sustainable than they actually are through the use of images, denominations, logos and labels.
Investment funds
Organisations that pool the money of several investors and are invested by a (fund) manager in securities (shares, bonds, other investment funds, etc.) according to the fundu0027s objectives (investment strategy).
Sustainability preferences
Sustainability preferences reflect the clientu2019s wishes on sustainable investment which must be taken into account by the professionals offering investment advice and discretionary investment management since 2 August 2022.
Sustainable finance
Sustainable finance is a development model that cares for the future, an organisational mode of our society with a long-term focus. The official definition was given at the Rio Earth Summit : u201ca development that meets the needs of the present without compromising the ability of future generations to meet their own needs.u201d This also means that finance must integrate present and future imperatives, such as environmental conservation, adoption of ethical behaviour and respect for human rights and values.u00a0
Sustainable investment funds
In the case of investment funds, a distinction is made between those whose investment policy is based exclusively on ESG criteria and those that invest only partially in sustainable assets.
Sustainable investment funds can, for example, pursue the following environmental goals:
- Mitigation of climate change;
- Adaptation to climate change;
- Sustainable use and protection of water and marine resources;
- Transition to a circular economy, waste prevention and recycling;
- Pollution prevention and control;
- Protection of healthy ecosystems.
- Depending on the orientation of the investment policy, the following types of sustainable investment funds can be distinguished, for example:
- Renewable energy funds, which invest in companies in the field of renewable energy production, storage, transport and distribution.
- Environmental technology funds invest in companies that offer environmental technology products and services.
- Eco-efficiency and energy efficiency funds invest in the treatment of water or the efficient use of resources to avoid pollutants.
- Climate change funds invest in companies that either benefit from climate change or actively combat it by offering products or services that contribute to reducing climate change or its consequences.
- Sustainability funds invest in companies that follow ESG criteria.
- Ethical-ecological investment funds select their investments by using negative criteria to exclude certain industries on ethical grounds. From the remaining industries, those companies that best meet certain sustainability criteria are selected for investment.
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Further information on:
https://www.abbl.lu/en/professionals/key-topics/sustainability
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