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The investment world is increasingly integrating factors related to social, environmental and governance issues into investment decisions, which are no longer based exclusively on financial elements. For Jean Duchein, Manager of BDL Transitions, the challenge of this responsible finance is “to select companies that will be able to meet the challenges of tomorrow and support them in their transitions”.
So-called ESG (social, environmental and governance) finance is becoming more and more extensive and today constitutes a significant, even dominant part of demand from end investors. ESG issues are now central both because of our society’s need to evolve and because of their omnipresence in corporate strategy.
Extra-financial criteria therefore have their place in the fundamental analysis of companies, but the rules for applying ESG must be adaptable to avoid pitfalls. We are thinking in particular of the antagonism between local ESG regulations and global geopolitics. ESG has always advanced within a framework considered stable, that of globalization. However, we have seen since 2018 and the start of what has been called the trade war between China and the USA that this framework could be called into question. The Ukrainian crisis is a new alert on the sustainability of this economic and social development without borders.
Cruel dilemmas ahead in ESG
If the multi-decadal process of globalization is giving way to a regionalization of the economy, can the ESG analysis grid remain reliable and above all be self-sufficient? The decarbonisation of the European economy, for example, which involves stopping coal-based electricity production, depends partly on Russian gas for the so-called transition period. If this supply turns out to be permanently cut off, finding the best solution will be problematic, with the risk of having to temporarily restart coal. Because the final objective is not only to succeed in the energy transition, but also to integrate the social impacts that this may entail, hence the notion of just transition.
Green finance advocating an exclusion of fossil fuels from the first euro is then faced with a dilemma: how to invest in the energy transition without coal and gas? Is it “right” to take the risk of penalizing the European economy by favoring environmental and moral criteria over social criteria? How to solve the problem of Europe’s external dependence on raw materials such as potash, necessary for fertilizers and today almost exclusively imported from the Russia-Belarus-Ukraine zone? Should we ignore our reservations about the governance of companies operating in these geographies?
Reconciling social impacts and environmental choices
Hard to imagine when almost all the countries on the planet were moving in the direction of increasing openness to the outside, such dilemmas are likely to multiply, calling into question the idea of an overly dogmatic ESG, as does to exclude from the portfolios from the first euro of turnover companies active in armaments, mining or fossil fuels. Such intransigent exclusions could on the contrary lead to a weakening of the European economy and ultimately invalidate all the efforts made in the field of ESG.
The solution does not lie in a simple grid of criteria, but in an enlightened finance, that is to say, pragmatic and cultivating a holistic vision. We sincerely believe that the consideration of ESG by finance creates value for companies and for society in general, but the extra financial must see broader than the immediate result and in particular better integrate the notions of improvement. . The transition to low carbon energies is essential, but it will be long and costly; Fossil fuels will remain essential for some time to come, unless we advocate a sudden decline, a source of possibly considerable social damage.
The need for enlightened finance
Support is therefore essential. We have to admit that this way of doing sometimes involves extremely counter-intuitive choices. For example, admitting that oil groups are also key players in the transition, because they are sometimes the ones who invest the most and the fastest in renewable energies. Perhaps we should also recognize that investment in armaments, in companies such as Thales or Airbus, remains positive for deterrence and therefore peace, which exclusion from the first euro of this sector, according to certain principles ESG, does not allow.
The challenge for players in the world of sustainable finance is therefore to know, in our view, not to penalize “bad students” from the start, but to select companies that will be able to meet the challenges of tomorrow and support them in their transitions. in order to maximize the creation of value for the shareholder but also for the environment, social and governance.