Jean-Marie Masse (IFC): A global standard for ethical investment
Jean-Marie Masse, Chief Investment Officer at the World Bank Group’s International Finance Corporation, says Luxembourg’s Label R ESG certification start-up takes an important step toward uniform ethical investment standards across the financial industry.
How do you see the evolution of ESG compliance and how important is it to develop common standards?
ESG stands for environment, social and governance, but I would distinguish between environmental and social factors on one hand, and governance on the other. The environmental and social aspects involve defining standards and applying exclusion lists to select investments, using criteria such as adherence to fair labour standards and addressing environmental risks. Governance is a slightly different issue that is better adapted to equity investments. Sound governance is often about respecting the rights of minority shareholders, and the accountability of a company’s CEO and managers to the board of directors and to shareholders. It also involves effective disclosure of companies’ financial and business performance, including strategy, risks and liabilities. ESG is seen by investors as an effective means to mitigate risks in their portfolio, and one of their tools to select companies for investment. It is generally admitted that the use of sound ESG criteria by investors can increase returns on investments.
« Label R provides services to private equity funds that amount to an outsourcing of ESG due diligence functions»
How does the Label R. initiative advance this process?
Label R. is about rating the adherence to environmental, social and governance criteria of private equity funds and their investment portfolios. Part of the duty of private equity fund managers is to conduct ESG due diligence on companies in which they are considering investing, and subsequently to report to investors on how they address ESG performance within their portfolio companies. Label R is a start-up venture that provides services to private equity funds that amount to an outsourcing of these due diligence functions by the funds’ managers. This approach adds value to the private equity sector, and offers standardisation of ESG practices for private equity funds that work with Label R. It represents a promising step toward establishing standards applicable across the industry as a whole.
What impact are green bonds having in emerging markets, and what role is Luxembourg playing?
Green bonds are just like conventional bonds, except they entail additional information disclosure from issuers to investors, both when the bonds are issued and afterwards in the form of an annual impact report. Green bonds are governed by the concept of ‘defined use of proceeds’, a menu of eligible assets that can be financed or refinanced with the bonds’ proceeds. These assets are mostly selected for their impact in reducing greenhouse gas emissions, and notably include renewable energy, energy efficiency including green buildings, and low-carbon transport means such as electric cars, buses, taxis and scooters, and mass transit systems. Luxembourg is playing an important role in this development through the Luxembourg Green Exchange, the global leader for green bond listing with a market share exceeding 50%. The shares of the world’s largest green bond fund, Amundi Planet - Emerging Green One – launched in February 2018 with $1.42 billion in initial assets under management – are among the many green investment instruments listed on the Luxembourg Stock Exchange. Emerging markets in general face the challenges of economic growth, demographic growth and increased urbanisation, which require massive capital investments. Green bonds bring together issuers with investors and allow the former to diversify their investor base, as well as signalling to the market their focus on opportunities in the growing green economy. Green bonds and non-green bonds carry the risks of the issuer and are offered to the market at a similar pricing, i.e. investors in green bond receives the same compensation as investors in non-green bond issued by the same issuer, all other criteria being equal. The International Finance Corporation invests in emerging markets worldwide and is among the world’s 10 largest green bond issuers. Our strategy includes encouraging the expansion of green bonds as an asset class in emerging markets by helping pioneer issuers in a country or region. The market is just getting started, and has vast potential for growth.