ESG investing: how sustainable finance labels work

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What are sustainable finance labels and from whom are they attributed, is it worth investing in ESG funds?

esg label sustainable finance

In ESG investments sector, the ESG labels of sustainable finance are enjoying increasing success: in Europe in 2019 the number of ESG funds (or sustainable funds) doubled, from 414 at the end of 2018 to the current 806, with assets managed for 302 billion euros, out of a total of approximately 500 billion euros of assets managed by funds that declare themselves sustainable, according to the latest data provided by Novethic.

Numbers on the rise, but which are little compared to the assets of socially responsible funds, which in Europe has about 14 thousand billion euros managed. However, the impression is that the path of development is traced and that, therefore, it is worth trying to understand how sustainable finance labels work and how they can really help ESG investments and sustainable finance in general.

How ESG labels work

European legislation has not yet produced a common label for all countries (perhaps by the end of 2020): to date, there are 8 different suistainable finance labels born in the last ten years, designed to reassure the asset allocation of portfolios and use them as points reference by responsible investment professionals.

Two parameters for receiveing the ESG label

The first refers to the inclusion that favors the “best in class” of the category, intended as the most virtuous companies, to be placed in the portfolio in the form of shares or bonds. The second is instead that of exclusion, that is, eliminating the sectors or securities least responsible from the portfolio.

Types of sustainable finance labels

Once the criteria are established, there are two main types of ESG labels, whose application divides the products into two classes:

  • funds with the ESG label because they can be classified “sustainable investments” (application of environmental, social and governance criteria) in the management of portfolios
  • funds “green” and that in most cases are environmental or climate thematic funds

Who attributes the ESG labels

There is no single “supplier”, given that the origins of sustainable finance labels can be traced back to specialized associations on responsible investments, organizations specializing in environmental labeling, and so on.

In France the government – the only case in Europe – has created two public ESG labels: the SRI one, which is dedicated to socially responsible investments, and the Greenfin one, which is instead intended for the most committed environmental funds for the ecological and energy transition.

Unlike the case of Belgium, which owns the Towards Sustainability label, while Luxembourg has the LuxFLAG label. In Scandinavian countries there is also the Nordic Swan Ecolabel brand.

Is it worth investing in funds ESG?

But let’s get to the heart of the matter for those who want to invest: is it worth investing in funds with a label of sustainable finance? Certainly, a fund with an ESG label can offer reassurance on the quality of the processes, considering the audit carried out by third parties. Although, evidently, it cannot be a sufficient element to say if it is a safe and profitable investment.

But it is clear that the sector is in a phase of strong development all over the world, and by 2020 the news should not be missing. For example, by the end of the year the European Union should approve Ecolabel, the green badge for investment funds and ETFs (even if the parameters to be respected are not yet clear).

Furthermore, it is becoming certain that 70% of the asset allocation of bond portfolios will have to be made up of EU green bonds that use European standards, and that the same fate – but probably with different proportions – will affect equities.

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