Next-Finance : How would you define impact finance in a few words?

Bertrand Desportes : Fortunately, there is no longer so much debate on the definition of impact finance. Following significant collective work, Finance For Tomorrow published a definition in September 2021 [1] which is now official and which has been adopted by most players in the Paris market following the signing of a declaration of support [2] in November 2021. This definition is as follows: "impact finance is an investment or financing strategy that aims to accelerate the just and sustainable transformation of the real economy, by providing evidence of its beneficial effects ".

It is based on the pillars of intentionality, additionality and impact measurement, to prove :

1. Research, over time, for ecological and social performance and profitability financial, while controlling the occurrence of negative externalities;

2. The adoption of a clear and transparent methodology describing the causal mechanisms through which the strategy contributes to the environmental and social objectives defined upstream, the relevant period investment or financing, as well as measurement methods, according to the so-called theory of change framework;

3. The achievement of these environmental and social objectives falling within reference frameworks, in particular the Sustainable Development Goals [3](SDGs), broken down at international, national and local level.

Why its distribution is still limited among SRI funds? Is it due to the absence of a specific label?

The volumes are in fact disproportionate: we are talking about 63.1 billion or 1.3% of assets under management in terms of impact, compared to more than 600 billion in terms of SRI. This is partly due to the very recent crystallization of the financial center around the concepts of impact finance, but also to the difficulty of creating and managing this type of fund over the long term (specialized teams, specific technical expertise per SDG, access to data, etc). The entry cost to make an impact is significant in terms of human, technical and financial resources.

But, to tell the truth, I would not present impact funds so directly as a category of the SRI offer. The trajectory of impact finance is rather to differentiate itself from it. The link between these two universes of management is in fact strongly questioned by management companies. SRI funds are in fact more closely linked to ESG management, with assets and an organization that do not make it possible to demonstrate the manager’s commitment or to measure a positive impact around the goods and services produced by the companies held in the portfolio with regard to, for example, one or more SDGs.

It turns out that a large proportion of the funds identified as having an impact are approved as solidarity or SRI funds. Nevertheless, solidarity and SRI funds are obviously not all akin to impact funds, as long as they do not demonstrate a level of alignment with global objectives, sufficient impact measurement or even additionality through a commitment more pushed.

Do not see any opposition between these two universes of management, there is on the contrary a real continuity. There is indeed a common base with the consideration of extra-financial elements in the selection of securities with regard to SRI and impact.

But impact finance assumes a real transformative capacity. It is not simply a question of saying that one selects or that one excludes an investment on the basis of criteria E, S or G, but of setting objectives ex ante and monitoring results ex post. Impact finance is truly at the highest level of sustainable transformation intensity and deserves to be identified in its own right.

In general, the issues surrounding impact as well as the notion of positive impact measurement quite clearly differentiate impact finance from other sustainable finance practices. As a result, you are right, a good number of players are wondering about the creation or evolution of French labels around impact.

The labeling of funds as “impact funds” would aim above all to guarantee the adequacy of the investments made with the impact objectives, in particular vis-à-vis investors. To date, the French labels (eg Greenfin, Finansol) are not recognized for reporting on the “impact” specificity of a fund.

So that in the long term, if we wish to encourage the development of impact finance, it will be necessary to clearly recognize its specificities through distinct labeling processes.

Could the introduction of European Regulation (EU) 2019/2088 Sustainable Finance Disclosure (SFDR) quickly change this situation?

The European Regulation (EU) 2019/2088 Sustainable Finance Disclosure (SFDR) will help sustainable finance in the broad sense but will not specifically participate in the development of impact finance or in taking into account its specific characteristics. Moreover, the notion of impact is not explicitly mentioned there.

We have just published in collaboration with the AFG a report [4] on impact finance which discusses, among other aspects, the articulation of impact finance with SFDR regulations.

90.5% of respondents to our survey consider that an evolution of the SFDR regulations is on the contrary necessary to better take into account and report on the impact. For 85.7% of respondents, the provisions of Article 9 in terms of reporting do not seem to allow the overall scope of the impact to be reported, even considering the recent publication of the latest RTS.

To make the link with your previous question, some players point out that it becomes problematic to classify impact and SRI funds in the same article at the risk of creating real confusion among investors.

In the short term, SFDR brings its share of new challenges for management companies with an impact finance practice. They must comply with it without however benefiting from a particular and differentiating visibility from the rest of sustainable finance.

What are the main challenges for asset management companies in terms of impact finance?

We highlighted and presented five major challenges around impact finance during an event [5] organized by Finance For Tomorrow last October at the Ministry of Economy and Finance under the aegis of the State Secretariat responsible for the social, solidarity and responsible economy. We have since had the opportunity to talk [6] with management companies about these challenges, which appear to be fully shared. I return them to you:

1. The availability, collection, harmonization and management of impact data;
2. The implementation within management companies of governance and processes specific to impact investing;
3. The convergence of impact finance market practices following the adoption of a common definition given by FFT;
4. The identification of specific approaches by SDG, broken down according to the types of assets with appropriate methodologies and tools;
5. The definition of transparent and comparable impact reporting in order to limit the risk of impact washing.

Note that 48.7% of participants in our survey identify the lack of impact-related data as "the" main challenge, whether this data concerns beneficiary companies and projects or management companies and portfolios with a view to comparison and reporting around the impact.

To be complete, Financière de l’Echiquier also proposed during these exchanges a sixth challenge relating to the simplification of the discourse around impact finance in order to be able to talk about it to as many people as possible. , without degrading the impact approach as such. This sixth challenge appears to us to be quite relevant and complementary.

Do you think that impact funds will be a great part of SRI assets in France?

Clearly, we expect a momentum in favor of impact finance. I give you some figures collected as part of our survey:

• 79.5% of respondents plan to launch one or more impact funds over a 1 to 3 year horizon.
• 30.8% of institutions plan to make impact finance their main activity in the future.

The answer is therefore positive, we can expect the development of numerous fund ranges. I sincerely hope that this development will be powerful enough to represent a significant share of the outstandings managed on the market, given the underlying challenges of sustainable transformation. Among the objectives most commonly targeted today in the strategies of impact funds, we find at the top of the list " Measures relating to the fight against climate change " (SDG 13), " Decent work and economic growth " (SDG 8) as well as “ Good health and well-being ” (SDG 3). These SDGs will undoubtedly remain preponderant, but we expect an expansion of the investment theses to the fourteen other SDGs.

It is nevertheless a long-term job because, in hollow, it supposes the rise in competence of more numerous teams and specialized in the impact. No doubt this is a matter of several years. In any case, I can testify that the management companies of the Paris marketplace are striving to build consistent and solid expertise over the long term, with, moreover, the fairly shared ambition of French leadership on this subject. And that in itself is excellent news.