The definition of sustainable investment is an important element of regulations related to sustainable finance. It makes it possible to differentiate between emitters able to participate in the transition to a sustainable economy - in terms of natural resources, climate or biodiversity, but also in terms of development and human rights. This exercise requires evaluating the contribution of an economic activity to a sustainability objective on the one hand, and ensuring that this activity does not harm other environmental and/or social dimensions of sustainable development on the other hand. This last challenge is materialized by the introduction of the principle of Do No Significant Harm (DNSH) in the SFDR regulation and in the European Taxonomy.
The DNSH test is based on different concepts in these two regulations. In the case of SFDR and financial players, this principle is based on Principal Adverse Impacts (PAI), which make it possible to quantify the negative impacts of a society on the environment or society. Thus, management companies must justify the sustainability of their investments by taking into account PAIs. This allows them to develop a reliable definition of sustainable investment and to prevent the risk of greenwashing.
In June 2023, WeeFin published The sustainable finance barometer taking stock of the ESG & impact practices of asset managers, based on a panel of 50 Article 8 and 9 funds within the meaning of SFDR.
In this study, we observed that 36% of Article 9 SRI labelled funds used a definition of sustainable investment that did not meet regulatory criteria. This figure fell to 28% for funds labelled ISR Article 8 and possessing a sustainable investment pocket. This analysis highlighted disparities in the development of a definition of sustainable investment. However, it did not make it possible to identify the origin of these breaches.
Thus, as part of the new studies conducted in 2024, the evaluation framework was updated to isolate the factors responsible for the development of inadequate sustainable investment definitions. In particular, three criteria were introduced to assess the quality of the methodology of the definitions: the consideration of the 14 PAIs, the transparency of the methodologies for taking into account and the reporting of impacts in the periodic SFDR annexes. These analyses were conducted over a scope of review extended to 75 funds, which made it possible to obtain even more representative data.
We saw the following results:
These observations are indicative of a lack of appropriation of the concepts introduced by SFDR by actors in the financial center. In particular, the definition of sustainable investment is criticized for its vague outlines, which create difficulties in analysing and publishing relevant information.
Moreover, the availability of data is now a major obstacle in the construction of a robust DNSH test. The data required to calculate PAIs are rarely reported by businesses; for some indicators, it is even impossible to make sufficiently accurate estimates due to the lack of comparable data. The principle of DNSH is in fact not very usable for these PAIs, and it is difficult to get around this obstacle by maintaining a credible sustainable investment definition. For example, our analyses highlight the low coverage of the incidence of PAI 12 (“Uncorrected gender pay gap”). For a sample of 50 management companies, an average of 23% of companies receiving investment communicated their average pay gap.
When data is available, you also need to be able to understand and interpret it appropriately. The best practice for building a robust DNSH test is to define, for each PAI, a threshold that should not be exceeded. Beyond these thresholds, issuers are either excluded from investing - this is the practice of “pass or fail” - or penalized in their ESG score. However, determining an adequate threshold is a difficult exercise for management companies. Indeed, since average raw values vary between sectors, geographies and years, it is sometimes complex to set a limit value to distinguish “good practices” from “bad practices”. For actors, it is therefore essential to develop expertise in all economic activities and to rely on a model built to define these thresholds.
