As the environmental and social emergency becomes more pressing, investors are increasingly interested in sustainable products. At the very least, they expect their investments not to harm the planet and society. Often, they want to go beyond that, with investments that help accelerate the transition to a green economy.
Today, marks a headline day for the Ecolabel as policymakers meet to discuss its future within the retail investment landscape.
As part of the Sustainable Finance Action Plan launched in 2018, the European Commission’s desire to develop an ‘Ecolabel’ for financial savings and investment products stems from this need for a greener economy. The EU Ecolabel is a benchmark for consumers; it highlights the most environmentally friendly consumer products (paper, washing-up liquid, etc.). For financial products, this will translate into products which provide a positive ecological impact. The extension of the ecolabelling approach to savings and investment products (the EU Ecolabel for Retail Financial Products) is in the process of being finalised, but the we do not believe the expected result will not be achieved.
Mirova has significant experience with SRI and green labels, and we have supported the development of the ambitious French Greenfin label. This obliges us today to speak out. In our analysis, as things stand, we regret to observe that the Ecolabel is heading for a large-scale failure; the main – but not sole – cause of which lies in the near-impossibility of developing listed equity products that meet the current draft criteria. The current goal of devoting 50% to ‘green’ activities is out of reach, as the green share of the main market indices is below 2%. Such objective will not be reached for a long time, if ever. According to our estimates, no diversified equity fund in Europe would qualify for the ecolabel today.
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This is a failure first and foremost for European retail investors, because Europe will not give them the chance to easily identify and access reliable “green” investment products for their equity investments. The Ecolabel also risks failure in terms of sustainability, as the absence or very low number of labelled funds will not encourage companies to adapt their business model to a green economy. Moreover, the Ecolabel risks being a failure regarding sustainable finance, with the development of the first ever European standard for investment funds only applying to a small number of assets under management.
Three concerns
We do encourage the development of high and demanding standards, but these standards must be attainable. We recently expressed support to the European Taxonomy with a preserved level of ambition, while reaffirming that standards and labels must make it possible to trace the path towards the Taxonomy. The Ecolabel seems the ideal tool for this. But today, it does not follow this road. We believe that several misunderstandings have led to this situation.
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The first concerns an aspect intrinsic to the nature of equity products: the need for sector diversification to balance risk. This is especially true for funds aimed at retail investors, which require controlled levels of risk-taking. Thus, even in an already dark green economy, a ‘sellable’ fund cannot be invested at 50% in green activities, as this represents a too limited diversity of sectors. If explained, retail investors can understand perfectly that this is not greenwashing, it is a matter of financial education.
Highly concentrated thematic funds, like for example passive funds invested almost exclusively in renewable energies, could perhaps pass the 50% ecolabel green threshold. But their level of concentration makes them very risky and therefore unsuitable for retail investors. These funds also have a destabilising potential: with too much invested, their level of concentration could dry up the green asset market, reduce its liquidity and proper functioning. This is undoubtedly not what the regulator is looking for.
A second misunderstanding concerns the alleged lack of environmental and social impact of certain asset classes, particularly listed equities. Some consider that the impact of investments in a listed equity fund, regardless of its green component, has little impact in the real world. However, if you reverse the argument you can see that it does not hold up. If these investments have no real impact, why would civil society denounce investments in listed shares of fossil fuels companies, and unsustainable businesses?
The absence of empirical evidence of impact does not mean the absence of it. The impact of listed equity funds is real, but, indirect and must be clearly explained. Above all, their impact is to be assessed not at the product level but at the aggregated level, considering all the funds are seeking the same objective. Research studies and our experience lead us to think that to maximise the impact of green funds, it is better to have 200 funds and large amounts of money focused in smaller proportions on a converging green objective than a dozen “pure and perfect” funds focused at 40-50% on green. The absence or low number of Ecolabelled funds would therefore erase any prospect of a positive impact on sustainability.
A third and final misunderstanding concerns the consequences of implementing the Taxonomy regulation. The impossibility of investing such proportions of assets in green activities is not only due to the lack of information at the level of issuers, but also and mainly to the fact that our economies are not yet at an advanced stage of ecological transformation. The industrial reality will not change overnight.
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We are calling for an Ecolabel that will actively contribute to changing our economy and offer European retail investors meaningful products. In particular, the green share of listed equity products must be reconsidered in a realistic and relative way: five times the estimated rate of the main market indices could be a starting point, i.e. around 10-15%. This rate should then be reviewed regularly as the market evolves and gradually move towards much more ambitious targets. Infrastructure investments and institutional investors should also be included in the project. We also call for no delay in the adoption of the EU Ecolabel. For both the Taxonomy and the Ecolabel, waiting and looking for a pure and perfect result will only slow down our collective action, while it is high time to act.
