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On June 13, the European Commission disclosed a new Sustainable Finance Package, which further demonstrates the ambition of the European Union to foster the financing of the transition.
We will come back on the details of those different proposals and their practical consequences for the investors. In a nutshell, the package contains:
In the meantime, we wanted to revisit the last released European Commission responses to the ESA’s SFDR queries. There are three key takeaways to remember:
You’ll find some further clarifications below, and DPAM’s stance on these 3 key points.
1. SUSTAINABLE INVESTMENTS: NO PRECISE DEFINITION
The European Commission maintains its stance on a transparency and disclosure framework, without prescribing a particular method for how an investment contributes to an environmental and/or social goal. The European Commission further refers to the policy choice enshrined in the SFDR to leave the responsibility to financial market participants to carry out their own assessment.
The risk of greenwashing thus continues due to the variability of approaches. Additionally, local authorities may adopt their own minimum rules, resulting in further fragmentation of the market.
Two significant initiatives should be highlighted to shed light on the issue:
1.1 DPAM’s definition of ‘sustainable investments’
The regulatory framework identifies three key components of a sustainable investment:
DPAM has defined sustainable investment by relying on its 20-year track record in sustainable investments and the SFDR pre-contractual disclosure template. this definition includes:
The activities aligned with the Taxonomy are clearly defined by the European Commission Taxonomy concerning climate change adaptation and mitigation goals. These will be expanded on with four upcoming environmental objectives that will be added to the Taxonomy (i.e. circular economy, pollution, water effects and biodiversity).
Regarding environmental and social objectives, DPAM refers to the Sustainable Development Goals, defined by the United Nations, which have become a recognised international framework.
Economic activities are considered to contribute to environmental objectives provided that the net positive contribution (considering both negative and positive contributions) to the environmental sustainable development objectives is, on average, positive.
Similarly, the economic activities are considered to contribute to social objectives provided that the net positive contribution to the social sustainable development objectives is, on average, positive.
In practice, all holdings are evaluated according to the following four options:
a) Green bonds and SDG bonds = Environmental objective
b) Social bonds = Social objective
The various stages in the construction of sustainable portfolios will first ensure that the social minimum safeguards are upheld by focusing on the issuer’s behaviour. Simultaneously, the ‘do not significantly harm’ principle is applied during various screenings based on activities and sectors. The contribution to an environmental and/or social objective is assessed from the singular perspective of the products and services developed by the issuer, alongside its behaviour.
Source: DPAM 2023
2. ACCOUNTABILITY OF SUSTAINABLE INVESTMENTS
As a reminder, two approaches are considered for the accountability of a sustainable investment:
The European Commission confirmed the feasibility of both approaches, which is crucial information for Article 9 products as these still stand a chance of existing as a result!
2.2 DPAM’s approach
DPAM has adopted the binary approach. This means that, as soon as an issuer is evaluated as contributing to an environmental or social objective, the entire position is included in the calculation of the environmental or social objective.
Please keep in mind that DPAM upholds the principle of no double counting i.e., as soon as an investment is evaluated as contributing to an objective aligned with the taxonomy, to an environmental objective other than taxonomy aligned, or to a social objective, it is classified into a single category and not taken into account for any other potential objectives it might meet as well.
As a reminder, please find our commitment regarding the sustainable investment objective according to the classification of our products.
Source: DPAM 2023
3. PAI CONSIDERATION – MORE THAN DISCLOSING
There’s been considerable confusion and a lack of clarity surrounding the concept of “taking into account” the principal adverse indicators.
The European Commission has clarified this by introducing the requirement for procedures to mitigate these principal adverse impact (PAI) indicators. Indeed, PAI indicators must be reported, but the mitigation procedures must also be disclosed. “The description related to the adverse impacts shall include both a description of the adverse impacts and the procedures put in place to mitigate those impacts“.
3.1 DPAM’s approach
Firstly, DPAM has disclosed its Principal Adverse Impact Statement at entity level on its website.
Secondly, DPAM has specified which products integrate the PAI indicators. Please refer to the summary table below.
Source: DPAM 2023
Finally, DPAM has explicitly detailed how each mandatory PAI is considered and taken into account. We explain how we go beyond disclosing the metrics at an entity and product level in our PAI Statement as well as our Sustainable & Responsible Policy.
The PAIs are defined as negative, material or potentially material effects on sustainability factors that stem from, exacerbate, or are directly connected to investment decisions or advice provided by DPAM. These are intrinsically linked to our desire to reduce the negative impact of our investments, which is embedded in the entire research and investment process from its inception.
First, the environmental PAIs, particularly those related to greenhouse gas emissions and energy performance, are analysed and monitored at both the issuer and portfolio levels.
Second, the social PAIs are systematically scrutinised through the three-step disciplined research and investment process, i.e.
Integration and prioritisation
The integration of PAIs into the investment process primarily focuses on understanding the materiality of the indicators in terms of risk and time horizon.
The prioritisation of PAIs depends on several elements: the availability of data, its quality and coverage, and its materiality in terms of sustainability risks.
Once the PAIs have been calculated, beyond their absolute level, the most important thing is to understand their origin and to take necessary actions to guide them in the right direction. Thus, dialogue, engagement, and voting can be significant levers for change.
Environmental PAIs such as carbon emissions, greenhouse gas emissions, waste or water consumption, are some of the topics for engagement, whether in the framework of Climate Action 100+, CDP or FAIR, or in the context of individual engagement stemming from our Responsible Investment Steering Group’s decisions on controversies. The same applies to social PAIs, such as human rights and employee rights via collaborative initiatives (e.g., through the Investors Alliance for Human Rights or the Facial Recognition collaborative initiative) or via individual initiatives. These topics remain in the minority on the agenda of shareholder meetings where we, as shareholders, can vote. However, we do not hesitate to use this lever to also put pressure on companies by voting against certain agenda items, to generally support ESG resolutions or to express our dissatisfaction with the board of directors. Our voting policy outlines the approach taken on ESG resolutions and shareholder resolutions.
After following the different rules for each step of the investment process (i.e. normative screening, controversy exclusion, controversy analysis and possible engagement, voting policy, engagement policy), an escalation and decision process exists that may ultimately lead to disinvestment.
In the specific case of government bonds investments, the first PAI relevant for government bonds (and countries as issuers) is related to environmental issues and focuses on the greenhouse gas emission intensity of the countries invested in. This indicator is an integral part of the country sustainability model developed by DPAM for its sovereign bond investments. It is therefore included in the country sustainability score and can influence this score positively or negatively depending on its level and evolution relative to other issuing countries.
The second PAI relevant for government bonds (and countries as issuers) is related to social issues and focuses on issues of social violations. Our country sustainability model looks at several indicators on this issue such as respect for civil liberties and political rights, respect for human rights and the level of violence within the country, commitment to major labour conventions, the issue of equal opportunities and distribution of wealth, etc. These different indicators are included in the score for the country. These different indicators are included in the country’s sustainability score and can influence it positively or negatively depending on its level and evolution in relation to other emitting countries.
4. GENERAL TIMELINE
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Investing incurs risks. Past performances do not guarantee future results. All opinions and financial estimates in this document are a reflection of the situation at issuance and are subject to amendments without notice. Changed market circumstance may render the opinions and statements in this document incorrect.