Developing a toolkit for responsible investment decisions

Thu 04 Mar 2021

Clarity of information provided to various stakeholders is a growing issue for financial organisations. Despite the efforts to increase transparency in recent years, historically, this has not always ensured the clarity of the information published. It’s a factor that has contributed to limiting public confidence in responsible investment. This is because it is only relatively recently that insurance companies, in line with others with obligations concerning ESG transparency, have responded consistently and effectively to market expectations.

The non-financial aspects of any entity are more qualitative and challenging to quantify than their financial statements. So, for a sustainable finance project to become mainstream, the ESG rating of financial securities’ issuers must be reliable. Quite simply, this helps investors to compare and make an informed decision that will ultimately meet their sustainability commitments.

Until now, non-financial ratings have had their limitations due to the lack of consistent evaluation methodologies or because the original data were not robust and often self-reported. Nor has the uneven attention to environmental and social aspects in evaluating certain products helped to bring clarity. Phrases such as best-in-class, best-in-universe, exclusion strategies, themed investments, shareholder engagement, impact investment have added to the confusion on ESG investment matters.

In addition, to enable funds to present themselves as “socially responsible”, traditional index producers including FTSE, MSCI, S&P, and Bloomberg have created specific social responsibility indices. Their ratings are generally based on data taken from balance sheets, reports, tax returns and other documents in the public domain, interviews with the stakeholders or information published by the press.

Developing common tools

Finally, introducing a common language that makes it possible to distinguish responsible assets from those that are not is one of the central guarantees for the quality of these investments.

For these reasons, European and national regulators, along with the relevant international bodies, have been considering the introduction of common tools to address these obstacles. These tools include:

• providing a distinction between “green” and “brown” investments¹ ;
• benchmarks such as the European low carbon benchmark and positive carbon impact benchmark² ;
• good practices outlined by recommendations of the IASB Task Force on Climate-related Financial Disclosures (TSFD), United Nations Sustainable Development Goals (SDG) and government assessment of the application of article 173-VI LTE ;
• as well as labels covered by the PACTE Law, Green finance and ISR.

Recently, investors have had access to cross-disciplinary and structural information, enabling them to be better informed and make more robust decisions, particularly concerning environmentally-friendly (“green”) investments. The consistency of these tools and the enhanced quality of ESG products are intended to strengthen competition in this market. The strategy adopted by insurance entities for their ESG offering will have to be reviewed accordingly.

Given the regulatory changes relating to ESG transparency and their profound impact on insurance entities’ organisation and strategy, we can expect to see an increase in the regulators’ powers. It is, therefore, up to insurance companies to ensure that they make use of and help expand the use of a standard toolkit to ensure that responsible investment decisions made are in line with regulatory demands.

[1] European Regulation 2018/0175 – unplublished ; [2] Regulation 2018/0180 – in force.