Extra-financial risks have always existed, but have never been precisely calculated. They encompass environmental, social and governance risks. For the past ten years, some companies have been integrating them under the name of CSR (Corporate Social Responsibility), which complements balance sheet and other financial statements.
In recent years, the international ESG (Environment, Social, Governance) indicator has gained in notoriety and aims to integrate dozens of qualitative and quantitative criteria respecting numerous standards and the degree of involvement of companies to take into account risks linked to the energy transition, physical/climatic risks, respect for the environment, certain social aspects as well as their governance.
The resurgence of climate issues, the growing interest of populations in living in a sustainable economy / a fairer society and the multiplication of international summits reflect the involvement of the financial world in this issue.
Following the Paris Climate Agreement (COP21), France has become a pioneer in the development of greener growth through Law n°2015-992 of August 17, 2015 on energy transition. This law sets the objectives of a new French energy model and supports green growth by reducing France's energy bill through the development of decarbonized energies.
In particular, Article 173 lays down the obligation for institutional investors to transparently publish their integration of ESG criteria, their participation in the energy transition and climate change mitigation for their investment operations in their annual report.
Non-financial portfolio risk indicators
Numerous international organizations have presented relevant indicators for measuring all climate risks or E, S and G criteria. Among them, the TCFD Task Force on Climate-related Financial Disclosure* regularly publishes recommendations along these lines. They are followed by various extra-financial data providers, who make numerous indicators available to investors (between 100 and 400 per company).
Whether it's the ESG indicator**, carbon footprint, gross activity rate, level of involvement in major controversies** or ethically controversial activities**, calculations are made on the basis of information provided in company annual reports, various company publications, authorities, the media, the law, by direct calculations, estimates by statistical models or extrapolations by business sector.
As a result, these indicators reflect companies' level of transparency and their willingness to disclose the information required to calculate them. However, the use of this raw data presents certain constraints. Poorly / poorly / not at all disclosed information generates indicators whose scores are biased.
Investors also need the universe covered by data providers to be maximized, and they take into account tens of thousands of listed companies to obtain an interpretable and reliable result.
The fund structures in which these indicators are calculated are sometimes complex or multi-level, requiring considerable research and development work.
The advent of responsible finance
New generations are concerned about the state of the planet. This has become a major issue, even if it represents only the first signs of a much more far-reaching change.
If investors and asset managers want to limit the impact of the climatic effects that are being felt more and more, and if standards in this area are being tightened, then yes, we are slowly entering the era of responsible finance. This type of finance will profoundly change the economy as we know it in the medium term, since the disinvestment of companies that make no effort will force them to review their business model. But for this to happen, standards need to be better defined, enforced and the same for all.
Today, there are several certifications and labels to identify responsible and sustainable funds. These include the SRI (Socially Responsible Investment) label and the TEEC label for "green" funds (Transition Energétique et Ecologique pour le Climat). Nonetheless, it is important to pay close attention to the actual investments made by funds certified by these labels, and to watch out for "green washing".
Finally, the current change in our way of consumption and our economic system must necessarily be undertaken by political actors (for its structuring) and economic actors (for its application). Studies estimate that 70% of today's students will have a job that does not exist yet. Many opportunities will be created in the area of climate risk and extra-financial performance measurement, especially in market finance. Moreover, new positions combining knowledge of financial products (analyst, quant), statistical calculation and measurement of environmental, social and governance indicators are already emerging. Making the link between the highly technical professions of finance and more human aspects (social, governance) can only bring more sense to financial professions that can sometimes be sorely missed.
Finally, the current change in our consumption patterns and economic system must necessarily be undertaken by political players (for its structuring) and economic players (for its application). Studies estimate that 70% of today's students will have jobs that don't yet exist. Numerous opportunities will be created in the field of climate risks and extra-financial performance measurement, particularly in market finance. In fact, new positions combining knowledge of financial products (analyst, quant), statistical calculation and the measurement of environmental, social and governance indicators are already emerging. Making the link between the highly technical professions of finance and the more human aspects (social, governance) can only restore meaning to finance professions, which sometimes sorely lack it.
Next steps in non-financial reporting
Today, the market for non-financial information is not mature or standardized. There are many providers of corporate data, applying different algorithms. The diversity of financial products makes it difficult to calculate a single indicator that can be used to understand the direction/risk of a portfolio or investment strategy. How do you differentiate/assimilate the risk of a bond, an equity, a sovereign debt, a convertible bond or a derivative?
Europe is due to standardize the future of non-financial reporting in the coming months, and the Basel Committee is expected to meet on this subject for the next directive to be published in the next few years; all financial players will have to follow their recommendations.
The United Nations has issued its own recommendations on the SDGs (Sustainable Development Goals), which should apply to countries with clear targets set for 2030. These goals are being adapted for companies as they begin to report on these 17 defined sustainable development goals.
In conclusion, climate change is not a fad, but an international determination to repair the planet we are gradually destroying. This historic effort must involve all economic players, and finance will be a driving force in enabling us to act quickly and respect the time constraints set at international summits. Many new jobs should emerge in this field in the short term, such as research and development analysts.
