On this occasion, Sabrine Aouida, co-founder and Chief Impact Officer of WeeFin, spoke about regulatory developments and the role of technology in sustainable investment. Here's what was discussed:
European Union legislation on sustainable finance has evolved rapidly in recent years, spurred on by the "Green Pact" championed by the European Parliament. However, the adoption of the new requirements by financial players was not immediate. Indeed, the regulations have been criticized for their complexity and for the confusion linked to their implementation timetable.
In response to these difficulties, the Commission has initiated a procedure to revise the texts in force. However, the direction this revision should take is currently the subject of debate. One of the major issues is the standardization of ESG processes.
Each regulation has been designed to address a specific market issue: the European Taxonomy establishes a common definition of sustainable activities, while SFDR and CSRD promote transparency for asset managers and companies respectively. In theory, these texts contribute to improving the coherence and intelligibility of sustainable finance activities. In practice, however, the procedures as a whole have become increasingly complex. The regulations are designed to be interdependent, but a number of inconsistencies hamper their implementation and, in some cases, compromise their fundamental objectives.
On the one hand, disparities in the timetables for the entry into force of the texts give rise to problems of ESG data availability. For example, SFDR requires managers of investment funds classified as Article 8 or 9 to report periodically on the extent to which their products have been aligned with the European Taxonomy since 2019. However, the list of activities eligible for the Taxonomy and the associated alignment criteria have only been available since November 2023. Added to this is the late arrival of CSRD, the first regulation to require companies to report their percentage of taxonomy alignment. The first CSRD reports will be published in 2025; by then, management companies' periodic reports will be de facto incomplete.
On the other hand, the concepts deployed by the various regulations give rise to confusion. The example of the "Do No Significant Harm" (DNSH) principle is particularly representative. Both SFDR and the Taxonomy regulation refer to this principle, but it does not have the same definition, nor is it applicable in the same way within the meaning of these two texts. In SFDR, DNSH is associated with the consideration of impact metrics ("Principal Adverse Impact", or PAI). Companies are free to define their own methodology for taking PAIs into account, and are the sole judges of the associated sustainability thresholds. In the Taxonomy, on the other hand, the DNSH principle is based on lists of precise, quantified criteria. If an activity does not meet one of these criteria, it is de facto excluded from the category of sustainable activities.
These misalignments have a negative impact on the development of ambitious strategies by financial players. The efforts of asset management companies are mainly focused on compliance, which tends to penalize the development of more complex and nuanced methodologies. The concepts requiring the most expertise and data are particularly neglected by investment strategies. Such is the case with double materiality - i.e., taking into account criteria relating to both financial risks and social impacts, the integration of which remains relatively immature.
Improving the functioning of the sustainable finance ecosystem must therefore first and foremost involve supporting players in their understanding of these concepts. For regulators, this support should focus on the methodological aspect, clarifying current requirements and harmonizing definitions. Revisions must also aim for greater consistency with other European and national regulations, such as Article 29 of the LEC in France. This support is essential and should be provided before new KPIs are added or the regulatory framework is redefined.
While there is consensus on the need to revise regulatory texts in the field of sustainable finance, there is no consensus on the form these revisions should take. One question in particular underpins the debate: should we move towards ESG standardization? SFDR's public consultation at the end of last year (2023) explored the possibility of standardizing funds' ESG strategies, which to date remain at the discretion of asset managers. However, ESG standardization does not have to take place at every stage of the sustainable finance activity chain.
Indeed, finance relies on a variety of objective data. There is therefore a clear need for standardization at two levels: in raw ESG data, which serves as the basis for building scores and strategies, and in ESG reporting at fund level, to improve readability and comparability for the end investor. The CSRD and SFDR regulations are working towards standardization in both these areas, at company and financial product level.
However, there is also a subjective dimension to the definition of a sustainable investment. The "sustainability" of a position depends on each investor's convictions, which is why there are so many different types of sustainable funds (impact funds, thematic funds, funds with a very high green content, etc.). Given the infinity of existing prisms, it is difficult to envisage standardized ESG practices in the future. What's more, it's essential that investors continue to build their own strategies in order to maintain discriminating criteria in ESG strategies. If this is not the case, the only discriminating factor will be financial considerations, effectively penalizing work in favor of sustainability.
So, while it is desirable that regulations encourage the standardization of ESG data, it is important that they preserve the diversity of strategies that rely on this information.
The evolution of definitions is therefore a central issue in the revision of European regulations. Nevertheless, it is important not to limit sustainable finance to a specialist debate and to guarantee its impact on the real economy in the long term.
WeeFin was created to help financial players develop more ambitious and transparent ESG strategies. Its aim is to help achieve a systemic impact on the real economy through end investors and companies. To achieve this goal, WeeFin provides its customers with a SaaS platform to industrialize their entire ESG operational chain. It facilitates ESG data collection, regulatory reporting, and indicator calculations.
This platform provides players with the technical resources they need to fulfill their commitments and communicate results transparently. It enables players to understand the data calculated when building their strategies, but also to limit their dependence on ESG score providers and produce better quality reports. This latter functionality is of prime importance, as it facilitates end-investors' understanding of financial products. Finally, the platform's Engagement module contributes to improving dialogue between financial players and the companies in their portfolios, which ultimately translates into a positive impact on the economy and society.
WeeFin supports its customers as they integrate best practices and await clearer guidelines from regulators.
