by Roland Rott, Managing Director of Inflection Point by La Française & Perrine Dutonc, Groupe La Française Advisor.
. How can ESG criteria enrich financial analysis?
ESG criteria complement the financial analysis by adding different perspectives to the financial statements. In particular, they shed light on environmental, social and governance issues not traditionally covered by financial analysis. They enrich the analysis for three reasons: (i) a time horizon geared towards the long term, (ii) an attempt to capture the impact of externalities and pending regulatory change, and (iii) a framework for assessing intangible assets like human capital, customer loyalty or brand value. Depending on sector- and company-specific circumstances these additional factors have the capacity to significantly alter the outcome of the financial analysis, for example, through revised revenue forecasts, margin assumptions, asset valuations or discount rates.
. What changes will the new European regulation imply for fund managers and investors?
New regulation if applied to all EU countries will level the playing-field between the different actors and provide a common understanding of sustainable finance, green activities or SRI funds. However, so far there are many different attempts to push forward national definitions instead and influence the EU regulation. So hopefully down the line, the outcome will bring clarity and a more harmonised approach, but this is not what we are observing today. While we support the need for harmonised regulation at the EU level, we are mindful of the unintended consequences in terms of limiting innovation and the regulatory burden on fund managers and investors.
. Will fund managers be required to have a portion invested under ESG criteria?
Funds managers will not have the obligation to invest a portion according to ESG criteria but there will be a push on the demand side from clients, and most probably a request from regulators to explain why they do not factor in ESG considerations.
. How can SRI change the investment world in the next five years?
Sustainable Investment can make a crucial change by shifting capital to sectors needed in a low carbon economy world and away from the most carbon-intensive ones. Climate change is the number one real-life topic for SRI to make a measurable impact. Including ESG criteria massively into investment decisions will help to foster the just transition needed across the world. Therefore, we expect that the investment world will fully embrace Sustainable Investment in order to remain relevant for society. The current sanitary crisis is a massive and immediate inflection point with a global reach. Sustainable investing gives more chance to assess the future impact of negative externalities that must be integrated when assessing a corporate strategy.
Disclaimer
This commentary is intended for non-professional investors only within the meaning of MiFID II. It is provided for informational and educational purposes only and is not intended to serve as a forecast, research product or investment advice and should not be construed as such. It may not constitute investment advice or an offer, invitation or recommendation to invest in particular investments or to adopt any investment strategy. Past performance is not indicative of future performance. The opinions expressed by La Française Group are based on current market conditions and are subject to change without notice. These opinions may differ from those of other investment professionals. Published by La Française AM Finance Services, head office located at 128 boulevard Raspail, 75006 Paris, France, a company regulated by the Autorité de Contrôle Prudentiel as an investment services provider, no. 18673 X, a subsidiary of La Française. Inflection Point by La Française Ltd, a company incorporated under English law and registered under number 08773186.