Eurosif's latest market analysis: Financial flows to promote the sustainable transformation of the real economy

Eurosif, the leading pan-European association promoting sustainable finance at European level, published on February 15, 2024 a new methodology developed for future market studies on sustainable investments across Europe. It was created in collaboration with the University of Hamburg, the Sustainable Finance Research Group (SFRG) and Advanced Impact Research (AIR). The methodology and a questionnaire to simplify its application are set out in the February 2024 report, which explains the chosen approach, the proposed investment categories and their core characteristics. In the following, CURENTIS explains the concept and its application background in an abridged version.

In the last 10 years, interest in investments in the area of environmental, social and corporate governance (ESG) and sustainability has increased significantly, particularly in Europe. The Global Sustainable Investment Alliance (GSIA) estimates the global volume of these investments at 30.3 trillion dollars for 2022. Despite these high investment amounts, the question arises as to the actual sustainability of the investments considered. The need for a shift towards real impact is emphasized in order to fully unlock the potential of capital markets and achieve the Sustainable Development Goals (SDGs) and the transition to a climate-neutral economy. Various regulatory approaches, particularly within the EU, aim to promote sustainable investment through transparency and long-termism.

The methodology builds on current regulatory developments and introduces new terminology to create transparency about investment aspirations and thus actively contribute to the sustainable transition. It defines investment categories based on three dimensions: The investment objective, the investment approach and the measurement of ESG or impact performance. These dimensions are used in the following four categories of sustainability-related investments:

(1) Simple ESG investments,

(2) Advanced ESG investments,

(3) Impact-oriented investments and

(4) Impact-generating investments.

Each category is defined by specific criteria ranging from the integration of ESG factors to measurable contribution to positive real-world impact. The methodology emphasizes the importance of transparency and ambition levels for investments to demonstrate their contribution to the sustainable transition:

• Simple ESG investments aim to integrate ESG factors taking into account risks or opportunities, possibly with a focus on ethical aspects. They rely on mandatory screening to select or exclude companies based on sustainability criteria, but without explicit ESG performance measurement. Their level of ambition is low as they do not directly contribute to the transition to a more sustainable economy.
• Advanced ESG investments focus on the systematic analysis and integration of ESG risks and opportunities and thus go beyond the basics of simple ESG investments. By applying mandatory screenings, they minimize risks and at the same time identify sustainable investment opportunities, e.g. in energy-efficient projects. Their strategy includes both exclusion criteria and the promotion of best-in-class and thematic investments. Unlike simple ESG investments, they explicitly measure the ESG performance of their investments, with their moderate level of ambition positioning them as potential promoters of the transition to a more sustainable economy.
• Impact-oriented investments aim to contribute by aligning their portfolios with companies that have a positive social or environmental impact. They use mandatory screenings to exclude harmful investments and promote those with positive effects, based on reference frameworks such as the SDGs or the EU taxonomy. These investments differ from advanced ESG investments in their measurement of impact performance, e.g. by comparing greenhouse gas emissions. Their medium level of ambition reflects the goal of contributing to sustainable transformation, but they do not provide direct evidence of investors' contribution to positive impact.
• Impact-generating investments aim to actively bring about positive social and environmental change. They use targeted screening and management mechanisms to invest in companies that can either increase positive impacts or improve their negative impacts. Through a formal engagement and alignment policy, they seek direct improvements in companies' sustainability performance. Unlike impact-oriented investments, they specifically measure the impact of their actions at company and investor level to document their contribution to sustainability. With their high level of ambition and strategic focus on real change, they embody a proactive approach to sustainable finance.

A key criterion that consistently characterizes all four categories is the exclusive use of binding screening procedures based on sustainability criteria. This categorization is also designed to be valid across different asset classes.

If an investment meets the requirements for more than one of the defined categories, it should be assigned to the highest category. For example, an investment that meets the criteria for both advanced ESG investments and impact investments should be classified as an impact investment.

Conclusion

The methodology presented provides a framework for the classification and evaluation of sustainability-related investments that goes beyond existing categorizations and aims to actively contribute to the sustainability transformation. The development of a systematic data collection approach and associated infrastructure is seen as an important next step for the application of this methodology in future market studies on sustainable finance. It will enable greater transparency and understanding of the actual sustainability and impact of investments, which is of great importance to investors, regulators and society at large.

We also stand for the creation of transparency in companies in terms of sustainable banking. Would you like to know how we can support you with your sustainability strategy? More at: www.curentis.com/consulting/sustainable-banking

About Eurosif:

Eurosif is the leading pan-European association representing the promotion of sustainable finance in the European Union (EU), the enlarged European Economic Area (EEA) and the United Kingdom (UK). As the umbrella organization of European national Sustainable Investment Forums (SIFs), Eurosif is committed to the expansion and development of sustainable finance. It also supports the commitment of global and European decision-makers to realize a transparent, high-quality market for sustainable investments. It does this by promoting appropriate, carefully designed regulations and established industry practices.

Eurosif's activities focus on significant contributions to public policy making and research. This work aims to develop a deeper understanding of ESG implementation, the sustainable finance market and the challenges faced by sustainability-oriented investors.

More information at: https://www.eurosif.org/