CSR: impact-based finance, ESG data challenge and innovative solutions

In recent months, all financial institutions have publicly committed to corporate social responsibility (CSR). At Societe Generale, this is a strategic priority and to succeed in this challenge, we want to go further, towards a global awareness of all our stakeholders, from our customers to our employees, not to our suppliers and our shareholders by registering these environmental and social issues in our DNA. This responsibility is now integrated into all our activities, and that is why in this issue, I give the floor to Claire Douchy, Isabelle Millat, Marie-Aimée Boury of Societe Generale to inform us and give their point. of view in their respective field but also in Lubomila Jordanova, with whom we launched an experiment of its PlanA.Earth solution, Happy reading!

Impact-based finance : How to turn the SDGs Funding gap into attractive investment opportunities

Marie-Aimée BOURY, Head of Impact Based Finance at Société Generale Corporate and Investment Banking

“With trillions spent to keep the economy afloat during months of lock down, States and companies must – more than ever – optimize the use of their capital and “do more with less”.”

As the clocks ticks towards 2030, current business and financing models fail to bridge the SDG annual funding gap of US$2.6 trillion, of which ca. 90% is in developing countries including 50% in Africa alone. To solve this collective challenge, Societe Generale is pioneering a disruptive approach to support new business models and digitaly-enabled financing solutions in order to accelerate the transition to an inclusive and low carbon economy.

This impact-based finance approach is grounded on the observation that the SDG funding gap is first and foremost and investment gap. There is no shortage of investors looking for impactful investments however bankable and scalable projects are difficult to originate in the amounts and at the pace needed to achieve the SDGs.

Indeed traditional business models do not work to deliver infrastructure and other affordable services needed in developing countries, and in some cases in developed countries as well. These projects often rely on payment risk from weaker counterparts such as Base Of the Pyramid (“BoP”) end-users or public entities in low rated countries. They also often come as small size investments in geographically dispersed areas – although with a strong replication and scale up potential.

However, by focusing on positive impacts and working on maximizing and monetizing them – “doing more with less” - projects’ bankability can be improved. Under this impact-based approach, impacts are put at the core of the strategic goals of these projects, on the grounds that sustainable profits and long-term value creation are derived from the ability to deliver positive impacts to all stakeholders and the environment.

For example, with a marginal increase in capital expenditures, an off-grid solar power mini-grid project could be “augmented” to bring increased or more reliable connectivity, which enables access to smart services and other advanced IoT technologies that can apply to agriculture, thereby increasing the largest source of revenue for most rural communities, or unlocks access to online education or telemedicine.

As highlighted above, impact-based business models take advantage of the fact that infrastructure, education, healthcare and economic development are intimately connected. The resulting enlarged client base, partnerships and diversification can materially reduce business and credit risk and improve access to funding.

Digitalization also plays an essential role in achieving this result.

First, data can be collected to demonstrate a project’s operational performance, payment track record as well as impacts anticipated and eventually achieved.?Such data is key to “deconstruct” the risk misperception that many investors have when considering investing in developing countries and/or new business models. Second, digital tools and AI can be used to optimize processes at each step. For example, during the financing phase, it can be used to design the appropriate level of standardization in due diligence and credit analysis to facilitate scale up by aggregating transactions in portfolios and optimizing their composition. The ability to efficiently gather and analyze project and impact data is a key driver to successfully implement an impact-based approach.

With trillions spent to keep the economy afloat during months of lock down, States and companies must – more than ever – optimize the use of their capital and “do more with less”. This is an obvious opportunity for all stakeholders to co-construct impact-based business models in order to respond to the world’s climate, education and health challenges, using collective intelligence to achieve the SDGs by 2030.

?https://www.unepfi.org/positive-impact/rethinking-impact/

The gold rush of non-financial data and what it means for FSI reporting

Lubomila Jordanova, co-founder and CEO of Plan A

“If data is the new gold, then FSI could well become both the repositories and the railways by which this new currency travels”

On July, 22nd 2020, Non-Financial Reporting (NFR) took on an entirely new meaning. The introduction of the EU Taxonomy as a unifying piece of legislation for sustainable reporting has changed the perspective. This framework was developed and adopted by the European Union Commission to formalize and unify a common framework that would give businesses a net-positive (or net-negative) score on their contribution to sustainability. It is divided into six categories: Climate change mitigation, Climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control and protection and restoration of biodiversity and ecosystems. Each company will receive a score on each of these categories that aggregate into a global percentage score.

In other words, indicators such as carbon emissions, ESG score, water usage or biodiversity are joining the (already) long list of indicators financial institutions must report on. From a data collection perspective, this is a sizable challenge. The legislation has come into force almost a year ago. From a banker or an asset manager’s point of view, it is an emergency. Technologies specializing in collecting this data for complex structures like asset portfolios are still rare. This is leading to a gold rush towards impact management solutions. Carbon and ESG accounting companies like Plan A are growing capabilities to dive deeper and deeper into non-financial data, or even using financial data to derive analytics on Environmental, Social and Governance dimensions of business. These tools need to cover essential challenges: data collection and centralization, accurate and rapid analysis, and recommendations to act for decarbonization. As a result, data that was once confined to the CSR department is transforming into valuable information used to steer business decisions.

Financial institutions are both on the frontline and in the deep end of this conversation. On the front line because of regulations like the EU Taxonomy in Europe or in the UK where “Non-financial information must be included in the Strategic Report” in order to “help companies identify sustainability risks and increase investor and consumer trust.” Not only is non-financial reporting a mandatory hygiene requirement but they are also in full use for risk assessment, informing investment strategies and driving business decisions.

FSI are equally instrumental in tracing emissions and collecting the data needed to accurately track and assign impact. In other words, Banks, asset managers, VCs and other funding institutions have both the requirement and the opportunity to become the centerpiece of impact data gathering and analysis.

If data is the new gold, then FSI could well become both the repositories and the railways by which this new currency travels.

As the saying goes, a craftsman is only as good as its tools. A signal for financial institutions to find the right support to hit the richest vein.

About the author: Lubomila Jordanova is the co-founder and CEO of Plan A, a Berlin-based startup developing an end-to-end platform that enables companies to measure, monitor and reduce their environmental footprint and improve their ESG performance. Societe Generale is in POC with Plan A's carbon accounting measurement and reduction software.

Risk, return, and outcome: Can digitalization solve the ESG Data Challenge?

Isabelle MILLAT, Head of Sustainable Investment Solutions at Societe Generale

?“If you ask sustainable and responsible investors these days about the stuff their dreams – or nightmares – are made of, there’s a good chance the “data” challenge will come up”

Comprehensive, reliable, and comparable data on companies’ Environmental, Social and Governance (ESG) performance is essential to inform sustainable and responsible investment decisions. And the need for data will only increase with mounting new ESG regulations mandating increased transparency on the sustainability credentials of investment portfolios and products.

Yet, company disclosures of material ESG information is often patchy, especially in geographies where sustainable investing is still lagging, or for smaller firms with limited means to report. And large agencies’ ESG assessments of businesses are generating mounting frustration: black-boxy, inconsistent, overpriced, static… ESG data bashing has become more fashionable than ESG itself!

Naturally, combining buzzwords together, new entrants in the space claim that big data and artificial intelligence are the silver bullets to address ESG data shortcomings.

By harnessing and processing massive amounts of information published by or on businesses, they want to offer more comprehensive, agile and pluralist assessments. Surely, innovation is welcome. Yet, its true value add will require more than a replacement of human analysts by processors.

First, the new model must tackle existing frustrations: transparency, open source software, and fair pricing will not be an option.

But altering the model is just the first step. Altering the nature of the output could be the real game changer. Sustainable investors have for a long time looked at companies’ management of environmental and social risks: robust internal ESG policies and processes limit risks or even benefit returns, hence they are relevant, or even material, to the traditional optimization of risk-adjusted return.

However, today’s sustainable and responsible investors have added a third piece to the equation: they want to optimize portfolios’ risk, return, and impact, or “outcome”, on sustainable development goals. More than efforts, they want to see measurable results. Impact reporting is moving to the core of investment decisions and stewardship. And regulators globally, who are set to make sustainable finance the new financial normal, are further pushing in the same direction.

Providing comprehensive, reliable, and comparable data on companies’ sustainable outcomes might prove an even greater challenge than assessing the ESG performance of their value chains. And, to steer clear from the inconsistency that’s been criticized in the past, another challenge will be to report the data along common standards, such as the United Nations’ 17 Sustainable Development Goals; or possibly the European taxonomy of sustainable activities, when it ends up encompassing social priorities, and not just the “green” ones. It’s tempting for new entrants in the ESG data space to innovate with yet another impact taxonomy; but joining forces into coalitions will fight the market’s fragmentation, while enhancing the much-needed transparency and comparability for investors.

If new technologies can help overcome these challenges, then they will bring a transformative rather than incremental benefit in sustainable investors’ quest for risk, return, and outcome.

Sustainable finance as a source of innovation!?

Claire DOUCHY, Head of responsible projects at Societe Generale Private Banking France

The European Green Deal is one of the most ambitious programs in the world for a more sustainable economy compatible with a scenario of drastically limiting global warming. And the major sustainable finance regulations that Europe is imposing on the financial world is a powerful means of action with multiple consequences.

While we are working to develop a responsible investment offer in order to meet the desire for meaning of our individual investor clients,

I also see it as a tremendous lever for innovation and a vast field of opportunities.

Here are some examples:

?????????????SFDR (Sustainable Finance Disclosure Regulation) requires managers of sustainable funds to be much more transparent and precise in their communication on the extra-financial data of the companies they hold in their portfolio. Faced with the complexity of what is expected, many players - including Société Générale - have outsourced the collection and use of this data, creating a lucrative market for "ESG" data. This market is changing rapidly and alongside the major Anglo-Saxon players, innovative fintech are emerging, which has won over leading asset managers

?????????????Europe has created two new low-carbon indices, the EU Climate Transition Benchmark (EU CTB) and the EU Paris-aligned Benchmark (EU BAB), thus opening up a space for financial product innovation. For example, via Lyxor ETF, you will be able to invest in a basket of companies which you will know that they are successfully implementing a transformation trajectory of their online business model with a global warming scenario limited to 1.5 degree.1

?????????????The adding of questions on sustainable preferences in the “specific investor profile” questionnaire will certainly bring ideas for innovation, like some startups which have developed algorithms for optimizing ESG profiling using behavioral finance.2

Make no mistake: the ultimate goal of the European Commission is to massively redirect savings flows towards a sustainable economy, the definition of which will become more and more standardized. This movement will certainly push us as the “inventors” of financial solutions to offer more financial products with positive impacts. The success of our partnership with the crowdfunding platform LUMO specializing in projects contributing to the ecological transition is an encouragement to continue in this direction.

?1.https://www.lyxoretf.fr/fr/instit/a-propos/news/product-news/lyxor-developpe-son-ecosysteme-d-etf-climat-accord-de-paris

?2.https://lessentiel.novethic.fr/blog/business-case-3/post/preferences-esg-des-epargnants-la-fintech-neuroprofiler-facilite-le-questionnaire-de-durabilite -