European retail investors deserve an ambitious EU ecolabel
But they will not have it.
As the environmental and social emergency becomes more and more pressing, European citizens are increasingly expressing their desire to invest their savings in sustainable investment products. At the very least, they expect their investments not to be harmful to the planet and society (4/5 are interested in ESG products, 2/3 have sustainability investment objectives)1. Often, they want to go beyond that, with investments that help accelerate the transition to a green economy (2/5 express the desire to be impact investors). 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 observation. The ecolabel is a benchmark for consumer-citizens: it marks the most environmentally friendly consumer products (paper, dishwashing liquid, etc.). For financial products, this translates into the search for a positive ecological impact. The extension of this approach to savings and investment products is now in the process of being completed. But the expected result will not be achieved.
Mirova is a leading player in sustainable investment, and since its creation has pushed for the adoption of more demanding labels. We have significant experience with these tools, with almost all of our strategies having at least one SRI label2, and five of them having the French public Greenfin label2 - undoubtedly one of the most demanding national green finance labels in Europe. This expertise obliges us today to speak out. As things stand, we regret to see that the ecolabel is heading for a large-scale failure, the main - but not sole - cause of which lies in the impossibility of developing listed equity products that meet the current draft specifications. The 50% "green rate" required for these funds is out of reach for this type of product, as the green share of the main market indices is below 2%. This objective will not be reached for a long time, if ever. According to the estimates we have, with data identical to that used by the European Commission, no diversified equity fund in Europe would be able to obtain the ecolabel today.
This is all the more bitter for committed players like Mirova as we seek to support the development of high and demanding standards. But these standards must be realistic. We recently spoke out in support of a European taxonomy with a preserved ambition. We then reaffirmed that the standards and labels that are being structured must make it possible to trace the path towards this target that is the taxonomy. The ecolabel seems to us to be the ideal tool for this. But today, it does not draw this road. It is therefore also our responsibility as field players to say so, in order to contribute to the emergence of solutions that actually work and to accelerate the change in our economies, in the real world. We identify several misunderstandings that have led to this situation.
The first misunderstanding concerns an aspect that is not sufficiently taken into account in the debates around the eco-label, and that is intrinsic to the nature of equity products: the need to diversify investment sectors. Even with the greenest strategy, a listed equity fund needs to invest in a sufficient variety of economic sectors to balance its risk taking. This is especially true for funds aimed at retail investors, such as those eligible for the EU Ecolabel, which require controlled levels of risk-taking. This means that, even in an economy that would already be dark green, a "sellable" fund cannot be invested at 50% in green activities, as these represent a too limited diversity of sectors. A retail investor who is given the time and transparency to explain this basic element understands this perfectly: this is not green-washing, it is a matter of financial education.
The only exceptions we can identify confirm this analysis. Highly concentrated thematic funds, such as for example some passive4 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 to be offered to retail investors. Even more serious, these funds also have a destabilizing potential: too much invested, their level of concentration could dry up the green asset market, reduce its liquidity and therefore its proper functioning. This is undoubtedly not what the regulator is looking for.
A second misunderstanding concerns the supposed and alleged lack of environmental and social impact of certain asset classes, particularly listed equities. Some actors consider that the impact of investments in a listed equity fund, regardless of its green component, has little impact in the real world because it does not translate into any tangible project. However, if is enough to de-zoom and reverse the argument to realize that it does not hold up. For if these investments have no real impact, if they do not change the game, why then would civil society denounce investments in listed shares of fossil fuels companies, and more generally in unsustainable businesses? The absence of empirical evidence of impact does not mean the absence of impact.
The impact of listed equity funds is real, it is potentially massive, but it is indirect and must be clearly explained to investors, especially to retail investors. Above all, their impact is not at the level of a single product. It is the aggregation of amounts directed towards the same objective - the taxonomy3, in the case of the ecolabel - that will make the difference, that will make companies' strategies evolve to create the appropriate business models for tomorrow's world. Various research studies have shown that to maximize 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 or 50% on green. The probable absence or low number of eco labelled funds will 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 so much due to the lack of information at the level of issuers as to the fact that our economies are not yet at an advanced stage of ecological transformation. Companies whose activities are compatible with the taxonomy do not hide green assets: except for a few pure players, these activities simply remain at a low level of development. This is no surprise: if the economy were already compatible with the Paris Agreement, we would need neither a Paris Agreement nor a taxonomy. These assets do not yet exist or do not exist sufficiently. According to ISS-ESG5's estimates, the assets potentially compatible with the taxonomy as it stands represent less than 2% of the main market indices. The implementation of the green turnover transparency obligation will greatly facilitate our work as investors, but it will not change the industrial reality overnight. This will happen gradually, over several years.
We are calling for an eco-label that will actively contribute to change 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 to 15%. This rate should then be reviewed regularly, for example every two years, to improve as the market evolves and gradually move towards more ambitious targets. Infrastructure investments and institutional investors should also be included in the project. We also call for no delay in its adoption. 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!