Last update: 26.10.2023
What is sustainable finance?
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.
To this end, a major regulatory framework has been set up: the Sustainable Finance Disclosure Regulation ("SFDR"). These regulations aim to bring transparency to sustainable finance and ESG risk management.
European Grean Deal
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 "PAI")
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 ("PAI") 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.
SFDR product transparency
As part of the European plan for a greener economy, a new framework was also developed in 2021 regarding the transparency regarding sustainability that products must provide. Specific European rules now define how and what asset managers and distributors must make available as information when the investment products they offer promote ESG characteristics and pursue sustainable objectives. Here, there are three levels of transparency depending on the product's intention or ambition.
It has since become commonplace to link SFDR products such as funds to the SFDR types "6, 8 and 9". However, these types or levels do not concern labels per se (whereby neither a commercial connotation nor quality assessment can therefore be attached to the types) but serve primarily as a frame of reference for market players to place the products offered in the right transparency canvas. Indeed, depending on the type to which a product belongs, other mandatory documents, warnings and information will have to be communicated to the investor. The more strongly the investment policy of the product is oriented towards sustainability, the greater the transparency obligations.
It has since become commonplace to link SFDR products such as funds to the SFDR types "6, 8 and 9". However, these types or levels do not concern labels per se (whereby neither a commercial connotation nor quality assessment can therefore be attached to the types) but serve primarily as a frame of reference for market players to place the products offered in the right transparency canvas. Indeed, depending on the type to which a product belongs, other mandatory documents, warnings and information will have to be communicated to the investor. The more strongly the investment policy of the product is oriented towards sustainability, the greater the transparency obligations.
Products that have a sustainable investment objective
- What: Products that have one or more defined objectives with regard to sustainability themes and wish to exert a positive impact in doing so
- SFDR Reference: Article 9
- Concrete: In line with the ambitions, these products should provide the most detailed information. In doing so, they take into account that -in support of their objective- they need to focus on underlying sustainable positions that all take into account the principle "do not significantly harm other sustainability objectives".
Products promoting ESG characteristics
- What: Products that elaborate ESG elements (exclusions, ESG analyses, PAI integration,...) in their investment policy without making additional sustainable investments
- SFDR Reference: Article 8
- Concrete: This type will provide more information on its ESG policy where the underlying investments respect the principles of good governance, but also indicates that it does not make sustainable investments.
This is clarified on the first page of the mandatory pre-contractual and periodic documents.
Products promoting ESG characteristics and making sustainable investments
- What: Products that elaborate ESG elements (exclusions, ESG analyses, PAI integration,...) in their investment policy and additionally making additional sustainable investments
- SFDR Reference: Article 8
- Concrete: This type will provide more information on its ESG policy where the underlying investments respect the principles of good governance.Besides, this type will also explain its sustainable investments (specifically, these investments must also comply with the principle "do no significantly harm other sustainability objectives").This is clarified on the first page of the mandatory pre-contractual and periodic documents.
Products that do not pursue sustainable objectives and do not promote ESG characteristics
- What: Products that have no ambitions in this area nor advance ESG elements
- SFDR Reference: In accordance with Article 6, these products do have to define their sustainability risk policies
- Concrete: This type may not publicise ESG or sustainability but will indicate how it manages any relevant risks.
The concrete setup of the sustainability objectives and ESG characteristics of an SFDR product depends on the product developer and its methodology. The types are therefore not homogeneous categories in terms of working method or parameters, and it is recommended that the predetermined ambitions and the methodology used for this are carefully read for each product.
The European Taxonomy
The Taxonomy Regulation aims to create a classification system for economic activities at the level of companies deemed "sustainable" from an environmental or social point of view.
The activity must first be on a European list of eligible activities that can substantially contribute to at least one of the six environmental objectives. For now, only two of the six objectives are defined and implemented. Moreover, the activities listed represent for the moment only a small segment of our economic life, thus agriculture, tourism and banking activities are currently not included.
In addition to being eligible, an activity must meet operational criteria that define how an activity must be conducted to meet the taxonomy and thus environmental objectives without causing significant harm to any of the other five objectives. An activity must also meet minimum safeguards (social or governance) to be considered "sustainable" (alignment with the OECD guidelines).
Concretely, companies will have to analyze their activities, and only those that comply with all these steps can be used to calculate the percentage of alignment with the company's taxonomy.
Further information on the sustainable investment objectives and the promotion of environmental and social (E/S) characteristics of the discretionary portfolios and the Article 8 and 9 investment funds under the SFDR regulation can be found in the precontractual documents.
Starting in 2023, periodic reporting will be introduced for discretionary portfolios and Article 8 and 9 investment funds under the SFDR regulation.
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