Frequently asked questions about ESG and investing

To make our society more sustainable, the financial sector needs to make substantial efforts too. These ambitions are known as ESG (Environmental, Social & Governance) and are legally enshrined in the EU Action Plan for Financing Sustainable Growth. Among other things, this has resulted in the EU Regulation establishing a framework for the promotion of sustainable investments (‘EU Taxonomy Regulation’), the Sustainable Finance Disclosure Regulation  (‘SFDR’) and the integration of sustainability factors in MiFID II.

These regulations enable you to specify your own sustainability preferences. Your investments are viewed in three different ways, each from a different perspective. Any financial products KBC proposes to you must comply with your stated preference. 

ESG looks to strike a balance between financial and economic performance, transparency, social interests and the environment. Contrary to popular belief, it turns out that this balance leads to better results for companies and society. There is a broad consensus that ESG objectives ultimately create added value for companies, both in terms of risk mitigation and value creation.

Source: Environmental, Social & Governance (ESG) - Private Equity - PwC
 

As part of its commitment to sustainable investment, the EU has introduced changes to the MiFID II suitability rules to ensure that your environmental, social and governance (ESG) preferences are taken into account during investment advice and portfolio management. That survey forms part of the investment profile.

This means that, as an investor, you can indicate to what extent you wish to invest in:
• Socially responsible investment (SFDR) You can determine the minimum percentage of sustainable investments (in accordance with SFDR) that the financial products (which KBC recommends to you) must contain.

• Environmentally sustainable investments (EU Taxonomy Regulation). You can determine the minimum percentage of environmentally sustainable investments (according to the EU Taxonomy Regulation) that the financial products (which KBC recommends to you) must contain.

• Financial instruments that take into account the Principal Adverse Impacts (PAI) on sustainability factors. You can choose indicators, broken down into environmental and social themes, ensuring that your investments limit the adverse impacts on sustainability factors within these themes.

The SFDR (Sustainable Finance Disclosure Regulation) is a set of European rules for the disclosure of information on sustainability in the financial sector. 

That legislation gives you greater transparency regarding the sustainability of your investment products. Sustainability-related information is provided in an annex to the prospectus, the annual report and in the SRD (Sustainability-Related Document published on the website).

What are sustainable investments?

Sustainable investments as defined in SFDR are investments in economic activities that contribute to an environmental objective, such as limiting the use of fossil fuels, or a social objective, for example a gender-neutral wage policy.
In addition, these investments in an economic activity must not undermine the other targets.

SFDR also defines what constitutes a 'sustainable investment':

• An environmental objective (E) as measured, for example, by key resource efficiency indicators on the use of energy, renewable energy, raw materials, water and land, waste generation and greenhouse gas emissions, or by the impact on biodiversity and the circular economy, or which contributes to this;

• A social objective (S), such as combating inequality or promoting social cohesion, social inclusion and labour relations, or an investment in human capital or in economically or socially disadvantaged communities;

• The condition is that the investments do not have a significant adverse impact on any of these objectives and that the investee companies follow good  corporate governance practices (G) , particularly in relation to sound governance structures, employee relations, compensation of staff and tax compliance.

The SFDR is a European regulation for ensuring that ESG information is transparent and can be compared in order to minimise greenwashing. This means that producers and advisers have to provide a lot of information on their public websites. For products (such as funds, unit-linked life insurance [class 23] investment products, etc.), additional sustainability-related information must be added to pre-contractual documents (like the prospectus) and periodic publications (like the annual report).

We make a distinction between three different types of financial products:

• Products that do not have sustainable investment as their objective and that do not promote environmental and/or social characteristics (Article 6 products)
  
• Products that promote environmental and/or social characteristics (Article 8 products)
  
• Products that have sustainable investment as their objective (Article 9 products).
  

It is a European classification system for determining which economic activities are environmentally sustainable. 

A business activity is environmentally sustainable if:

• It fundamentally contributes to at least one of the following environmental objectives (based on the technical screening criteria):

• Climate change mitigation
• Climate change adaptation
• Sustainable use and protection of water and marine resources
• Transition to a circular economy, waste prevention and recycling
• Pollution prevention and control 
• Protection and restoration of biodiversity and ecosystems
  
  

• It does not harm the other five environmental objectives

• It tests social and governance elements against minimum standards and meets them. 

It is only when these requirements are met that the business activity is regarded as environmentally sustainable under the EU Taxonomy Regulation.

With the Green Deal, the EU has set itself the goal of becoming the first climate-neutral continent by 2050. The EU also has objectives for other environmental themes.

As part of its efforts to achieve these objectives, the EU has drawn up an action pan to channel funding towards sustainable investments. This plan also provides  definitions of ‘sustainable’ and ‘green’ activities: i.e. a taxonomy.

This makes it clear to everyone which projects/investments are actually very sustainable and which projects are not ambitious enough to be regarded as 'green'. The EU Taxonomy aslo makes ‘greenwashing’ more difficult.

Wikipedia defines greenwashing as the pretence by a company or organisation to be greener than it actually is. They might appear conscientious about minimising their environmental impact and/or actively taking on societal challenges, but this often turns out to be little more than window dressing.

Companies must report what percentage of their activities and investments are environmentally sustainable according to the EU Taxonomy Regulation. This will increase transparency and prevent greenwashing, as the same criteria of the EU Taxonomy are applied.

A financial institution like KBC also has to report how many sustainable activities we finance, for all our activities. Therefore, we have to report what percentage of our loans, insurance policies, funds, etc. comply with the EU Taxonomy Regulation. This requires specific data, which differs for each activity.

Economic activities can have not only a positive, but also an adverse impact on sustainability factors. Principal Adverse Impacts (PAI) refer to the adverse impact of investment decisions on sustainability factors such as the environment, social matters, respect for human rights and anti-corruption measures. At KBC, we too report on the adverse impacts on sustainability factors we take into account when making investment decisions. For more information, see the annex to the prospectus or the annex to the management rules.

The European Commission believes that customers and investors will use this information to select the companies from which they wish to purchase products or services, and that they will focus on companies which seek to minimise adverse impacts on sustainability factors.

It also hopes that this will have a trickledown effect, i.e. provide a strong commercial incentive for underlying investee companies and will encourage product providers to adopt the kind of standards that the Commission would like to see widely applied in the areas of climate change, diversity, anti-bribery, etc.

Examples include greenhouse gas emissions, hazardous waste, pollution of water sources, loss of biodiversity, controversial weapons or lack of anti-corruption and anti-bribery policies. We divide them into the following themes: 

• For investments in companies:
  o Greenhouse gases
  o Biodiversity
  o Water
  o Waste
  o Social affairs and employees

• For investments in countries and supranational institutions:
  o Environment
  o Social

• For investments in realestate assets:

o Fossil fuels
o Energy efficiency

A set of 18 mandatory indicators (listed in table 1) has been devised under these themes.

An investment can take these principal adverse impacts into account by: 

• Applying exclusion criteria, whereby fossil fuels are excluded, for example;
• Setting investment targets, for example by investing in companies that reduce their greenhouse gas emissions;
• Formally challenging companies to reduce their principal adverse impacts on sustainability factors;
• Exercising voting rights to vote on environmental, social and governance issues at company shareholders’ meetings. 

KBC is committed to sustainability. We were a pioneer in Belgium, launching the first responsible investment fund in 1992 and the first responsible pension savings fund. We remain committed to this approach, now and in the future.

We have our own sustainability approach whereby we recommend responsible investments as the first option.

We have aligned our sustainability strategy with the United Nations Sustainable Development Goals (better known as the ‘Sustainable Development Goals’ or SDGs).

Based on these goals, we have translated our strategy into three cornerstones:

• Enhancing our positive impact on society
• Limiting any negative impact we might have on society
• Encouraging responsible behaviour on the part of all employees
  

We transparently share our strategy, achievements and areas for improvement in the Report to Society, an annual publication describing how we are playing our part in society and working with our customers to achieve a more sustainable future.

The full Sustainability Report is available in English on the our website.