Last update: 08.11.2022
What is Sustainable financing?
Sustainable financing refers to the process of taking Environmental, Social and Governance (ESG) considerations into account when making investment decisions.
More specifically, environmental considerations include issues such as climate change mitigation, biodiversity conservation, pollution prevention and circular economy. Social considerations relate to issues of inequality, inclusion, labor relations, investment in human capital and communities and human rights issues. The governance of public institutions and the private sector, including management structures, employee relations and executive compensation, plays a fundamental role in ensuring that social and environmental considerations are taken into account in the decision-making process.
In the EU political context, sustainable financing is defined as a set of initiatives designed to support economic growth while reducing environmental pressures and taking into account social and good governance aspects.
In order to do this an important regulation has been introduced to establish a new framework. This is the so-called Sustainable Finance Disclosure Regulation ("SFDR"). This regulation aims to provide transparency with regard to sustainable finance and the management of risks related to ESG factors.
At EU level, sustainable finance aims to support the objectives of the European Green Deal by guiding private investment towards energy transition and towards a carbon-neutral, climate-resilient and resource-efficient economy.
In achieving these objectives, the financial sector has a key role to play in:
- redirecting investment towards more sustainable technologies and businesses;
- finance growth in a way that is sustainable over the long term ;
- contribute to the creation of a circular, low-carbon, climate-resilient economy.
Sustainable Finance Disclosure Regulation: a new European regulation
The SFDR regulation imposes transparency for all financial institutions when they design products (as Financial Market Participant) or provide financial advice (as Financial Adviser). These transparency requirements require a description of how sustainability and ESG factors are integrated into the investment services provided by these financial actors, such as asset management. These rules require, among other things, a description of how sustainability risk is taken into account in internal investment selection and decision-making processes as well as how the possible "negative impacts" of investment advice or decisions issued by the Bank are considered.
Our involvement
in this process
Sustainability Risk
In order to act in the best interests of our clients, the Bank, as a Financial Market Participant and Financial Adviser, systematically assesses the likely impacts of sustainability risks on the performance of its financial products. In order to do this a due diligence and research process is put in place by the Bank. Specifically, under the SFDR, we are required to disclose how we integrate potential sustainability risks into our investment decision-making processes. This is why we have developed a process for the selection and classification of all underlying assets used to compose SFDR products. As a result, products labeled as sustainable or benefiting from environmental or social integration have undergone an ESG review, where sustainability risks played an important role in determining whether the product was eligible for our Investment Universe. In addition, the Bank has taken sustainability risk management into account in its remuneration policies.
Negative impacts (Principal Adverse Sustainability Impacts "PASI")
In accordance with SFDR regulations, the Bank, as a Financial Market Participant and Financial Adviser, must also disclose information on its policy regarding the consideration of the main negative impacts of investment decisions on sustainability factors.This transparency of Principal Adverse Sustainability Impacts ("PASI") is actually a list of ESG elements on which the Bank's investment decisions could have an adverse impact, for example, climate change or deforestation.
In line with the sustainability risks philosophy, the bank believes that the selection of investment fund issuers, companies with lower ESG risk exposure and/or better management of this exposure will reduce the impact on PASI.Finally, as part of our due diligence process, we give priority to companies that outperform their peers (within a sector) on environmental and/or social issues and we strongly limit the number of companies with lower performance on these issues. In doing so, we try to limit our impact on PASI.
Product description according to articles 8 and 9 SFDR
As part of the European plan for a greener economy, Articles 8 and 9 of the European SFDR Regulation have defined certain criteria to distinguish between different investment funds and types of discretionary management based on their ESG characteristics, objectives or commitments.
Characteristics
Article 6
- Called "neutral products"
- Cannot be promoted as "ESG or sustainable"
- However, information on the integration of sustainability risks must be disclosed to investors.
Characteristics
Article 8
- Called "ESG integrated products"
- Environmental or social characteristics promoted by the financial product. They are therefore promoted/marketed as incorporating ESG criteria.
- No sustainable investment targets for Article 8 standard products
Characteristics
Article 8+
- Sub-category of Article 8 products of the SFDR
- Environmental or social characteristics promoted by the financial product. They are therefore promoted/marketed as incorporating ESG criteria
- Financial products that have a sustainability objective.
Characteristics
Article 9
- Called "impact products"
- The objective of the financial product is sustainable investment
- No material prejudice to sustainable investment objectives
- The final goal is to search for concrete environmental or social improvements
A specific document concerning the description of discretionary portfolios and their ESG characteristics is available in Dutch and in French. You will find more information on the elements that Degroof Petercam has put in place to classify its investment funds and management portfolios and the binding rules applicable within our policy.
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