A transparent and universal extra-financial measure: the only guarantee of a systemic societal transformation
By Paul Allard, impak CEO
Today, all the independent players in the extra-financial rating world are playing on the American field.
The reason is that the economic model of a credit rating agency requires it to be financed significantly by long-term stable capital. And that is precisely what American firms have offered them. After BlackRock was given a mandate to integrate ESG standards into the banking business, several European financial players are now questioning the sovereignty of non-financial disclosure standards in Europe. Especially as the topic of sovereignty comes back to the forefront due to the COVID-19 pandemic, which is unveiling a global economy with feet of clay.
The world of tomorrow, an opportunity for a new generation of Responsible Finance
Considering the conditions of the post-COVID-19 recovery, many of us are making the same observation: it is urgent that asset managers, businesses, regulators, and governments integrate social and environmental issues at the heart of their business models, mission and priorities. It is essential to learn from the current crisis. The time is no longer for commitment, but for action.
In order to respond to the climate emergency, it is imperative to raise the standards of extra-financial measurement, as the ones currently in place have not ensued any real systemic transformation.
For several years, European responsible finance has evolved rapidly and demonstrated its dynamism. For the next world, in my opinion, we must definitely move in this direction and seize this extraordinary opportunity for France and Europe to become the leaders of responsible «new generation» finance. A responsible “new generation” finance based on transparency, the universality of non-financial standards and the rigour of measuring impacts will be the bulwark against greenwashing and impact washing.
How do we get there?
In our view, two essential elements must be implemented. First, we need a framework for measuring environmental and social impact that is universal, transparent, consensual and rigorous. Then there is the emergence of an independent impact rating agency that is supported by stakeholders.
As these two elements already exist on the chessboard, the response to the sovereignty of the “new generation” extra-financial rating can be put in place quickly!
- A universal, transparent, consensual and rigorous framework for measuring environmental and social impact
First, we believe it is critical that the financial sector, including regulators, embrace and become a stakeholder in the Impact Management Project (IMP), the largest open-source consensus-based methodology framework for measuring social and environmental impact. Since 2017, IMP has co-developed with its 2,000 industry stakeholder signatories a transparent, rigorous and universal methodology aligned with the 17 United Nations Sustainable Development Goals. It allows us to measure the true impact of companies, thus avoiding greenwashing.
By overcoming structural weaknesses in the current ESG approach and rating, IMP is the next generation of monitoring and impact measurement. If it adopts a transparent methodological standard based on a holistic approach that integrates not only the mitigation of negative impacts but also the measurement of positive impacts and governance, Europe will impose itself on the global extra-financial scene and create a barrier to American competition while protecting investors from greenwashing.
If Europe does not adopt a universal method of measuring impact, all thecurrent in- house methods will disappear in favour of a standard imposed, most likely, by the Americans.
- Promoting and supervising an extra-financial rating agency in Europe
Secondly, financing the emergence of a European extra-financial rating agency based on IMP would allow France and Europe to consolidate their leadership on new responsible finance. Having unveiled the impak ScoreTM of CAC 40 companies in Paris on February 19, 2020, impak, the first independent impact rating agency is ready for this role. Our Franco-Canadian-based start-up has been working for 3 years on the development of its tools and has the necessary expertise.
Moreover, the mobilization of a syndicate of institutional investors, such as the leaders of European Asset Management, could meet the requirements of capitalisation and independence while accelerating our deployment at the European level.
As for ESMA, the European regulator, it will be responsible for supervising non-financial rating agencies, by requiring that the highest methodological standards be applied, and by requiring that issuers be rated by an independent agency. This will allow asset managers to have reference non-financial measures ensuring the comparability of all players.
Finally, thanks to simple and rigorous ratings, individual investors will be better informed and will be able to direct their investments towards companies that are making real and measurable efforts to align with the UN Sustainable Development Goals, thereby limiting greenwashing.
The investment choices we collectively make for the next generation, by measuring their real environmental impacts, will determine our ability to effectively address climate risks and their disastrous consequences. Organizing effective resilience to avoid the next crisis is our next challenge and we have the tools to do so. The transparent and universal non-financial measure has become a decisive strategic element for France, Europe, investors and society as a whole. In a post-COVID era, no investment should be considered without measuring its social and environmental impacts. Let us learn from the fragility of our humanity and our systems.
France and Europe have the opportunity today to put in place a mechanism allowing a real systemic transformation of finance.
It’s all there, just do it.