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​Questions and Answers on Sustainable Finance


Last update: 18.12.2018

 

1 - What is Sustainable Development and Sustainability?

Sustainable Development is an economic development model aimed at meeting the needs of present generations without jeopardising the needs of future generations. It emerged in 1987 with the United Nations Bruntland Report following warnings concerning the need to incorporate the impacts that human activity has on the Environment (and Society) into traditional economic models. Subsequently, the concept of Sustainability emerged, understood to be the application of this model in the private, public and tertiary sectors. Sustainable Development does not require the elimination of the economic-financial factor (i.e. profit), instead this model cautions the need to include environmental and social impacts in the way economic and financial returns are generated.

 

2 – What are the Sustainable Development Goals (SDGs)?

They are 17 Sustainable Development Goals established by the UN in 2015 to foster Sustainable Development. They were developed to replace the Millennium Development Goals (MDGs) completed in 2015. Unlike the MDGs, the SDG framework makes no distinction between "developed" and "developing" countries. Thus, the SDGs are part of the creation of a global model of corporate governance that focuses on individuals, human rights, the response to social inequalities and core issues such as peace, security and climate change. Reference to the inclusive, balanced and sustainable use of financial resources goes through the SDGs.

 

3 - What is "Sustainable Finance"?

Sustainable Finance comprises any financial service or product that integrates Sustainability criteria into its characteristics. In particular, this integration concerns the inclusion of Environmental, Social or Corporate Governance (ESG) factors in the business models or decisions of private, public or the tertiary sector (NGOs). Sustainable Finance thus aims to contribute to Sustainable Development by, for example, financing society's innovational, conservational and infrastructural needs, and promoting a resource-efficient economy by minimising negative impacts on the Environment (e.g. low carbon emissions) and in society (e.g. at local-community level). At the same time, they aim to contribute to the stability of financial markets, by considering the social, environmental and corporate governance risks associated with the activities of the market agents.


4- What are ESG factors?

The acronym ESG stands for Environmental, Social and Governance and pertains to environmental, social and corporate governance factors. Environmental factors include, inter alia, concerns related to the ecological footprint of a company, region or country and the need for environmental preservation, environmental policy and environmental product management. Social factors include employee rights, security, diversity, education, human rights, access to health and physical development, literacy, among others. Corporate governance factors refer to the system of policies and practices under which a company is run and controlled, covering issues of transparency, independence of corporate bodies, shareholder rights, anti-corruption, and organisation of the corporate governance model for achieving long-term goals, among others. Introducing ESG factors into business and investor decisions, together with the economic and financial factor, seeks to help mitigate financial risks (e.g. those associated with polluting industries), market safekeeping and boosting financial return and the development of businesses and markets.

 

5 - What activities fall within the scope of Sustainable Finance?

The Sustainable Finance area includes financial activities that integrate ESG criteria in its creation and management. Sustainability strategies can be found, for example, in management or investment decision-making by companies (namely listed companies), by reflecting the adoption of these strategies into financial instruments or entities that integrate ESG elements (such as green bonds, green loans or social entrepreneurship funds) or the way in which social rights are exercised, thus aiming to contribute to Sustainable Development.

 

6 – What are sustainable assets and investments?

Although its definition is not based on a uniform criterion, the CMVM understands that an asset or investment is sustainable when it incorporates ESG factors. Thus, sustainable investments include investments commonly referred to as impact investments, ethical investments, community investments, green investments, inter alia.  A common denominator for these types of investments is that they incorporate one or more ESG factors, in addition to its financial return. Two of the most widely used strategies for creating and managing sustainable investments - for example, for the composition of an investment portfolio - are the exclusion of industries or projects that contradict ESG (negative screening) principles and the inclusion of industries or projects that favour ESG (Positive Screening) principles. Other strategies include best-in-class (search for the best performing company or project in ESG factors within its class) and shareholder activism.

7 – What is impact investment?

It is an investment that, in addition to financial return for the investor, aims to generate specific beneficial social or environmental results that are measurable, i.e. whose impacts are 'visible'.


8 – What is ethical investment?

Ethical investment actively eliminates or selects investments according to specific guidelines that favour industries that meet ethical criteria or exclude others that consider them to be disregarded or harmful, for example involving alcohol, gambling, tobacco or weapons.


9 - What is community investment?

Community investment is the practice of directing investment capital to communities, sometimes associated with private communities accessing the traditional services of financial institutions. It is generally intended to allow or facilitate access to credit, capital, housing and basic banking products to which these communities do not have access.


10 – What is Green Investing?

These are investment activities focused primarily on the Eco-Factor, including investments in renewable energy, energy efficiency, clean technology, low carbon transport infrastructure, water treatment and resource efficiency. 

 

11 – What are Green Bonds?

Green bonds are debt securities aimed at issuers' financing and are instruments specifically designed for climate and environmental projects contributing to Sustainable Development. Most green bonds issued to date, fund renewable energy projects, energy efficiency measures, low-carbon public transport and water technology. Green Bonds may be issued by States and private issuers.

 

12. What is PRI – Principles for Responsible Investment?

It is a United Nations-backed international network of investors and asset managers working to put into practice six Principles for Responsible Investment (PRI). The objective is to understand the implications of sustainability for investors and to support signatories to incorporate these issues into their investment decisions and their participation in the decisions of the companies wherein they are shareholders.

 

13. What is the origin and specificities of investing in social entrepreneurship?

Based on perceived insufficiency and inadequacy of traditional models of financing social initiatives and companies, based essentially on public and private financing mechanisms of a charitable nature, investment in social entrepreneurship was conceived as an alternative model of private financing for social initiatives and companies. This alternative financing model aims to combining talent, business rigor and innovative business perspectives with ethical and social objectives, based on three fundamental pillars: professional management, transparency and measurability of the social impact of investment. Learn more at CMVM Q&A on the topic.

 

14. Is there a specific legal regime in Portugal for social entrepreneurship funds and companies?

Yes. As of 2015, there is a specific legal regime for social entrepreneurship funds and companies. In November 2018, the CMVM registered the first social entrepreneurship company, which has already started the constitution of the first social entrepreneurship fund under this scheme. 

 

15. What is shareholder activism?

Generally speaking, it refers to shareholders who adopt an active and intervening strategy in the company's life, namely by participating in general meetings and exercising voting rights - thus influencing the decision-making of managers - by strengthening the shareholding position or by reducing this position (divestment). The adoption of shareholder activism strategies can contribute to the implementation of Sustainability policies and practices when used as a form of pressure on corporate management to adopt measures that meet the will of shareholders in environmental, social and governance issues (ESG factors).

16 – What is the difference between Positive Screening and Negative Screening?

Both strategies create sustainable investment. In positive screening, companies or projects that have ESG factors beyond the financial characteristics (risk and return) are selected. Thus, positive screening consists of the inclusion in an investment portfolio, companies or projects that incorporate ESG factors. In negative screening, companies or projects that do not meet predefined ESG criteria by those who seek (create) this investment portfolio, are excluded from the investment portfolio. Thus, negative screening excludes sectors/industries that have associated negative impacts on ESG scopes, such as the weapons, tobacco and polluting industries or that cause other environmental or social degradation.

 

17 - What is distinguishable in a socially responsible organisation?

An organisation is deemed socially responsible when besides that which is required by law, considers the social (aiding the local community) and environmental (fighting pollution) impacts in its actions, strategies and decisions, in addition to the usual economic impacts (job creation).  It may even pressure its stakeholders (suppliers and competitors) by way of making them socially responsible as well.