06 Jul 2021

What’s in a label? Informing better decisions and avoiding greenwashing

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For marketing purposes - For qualified investors only
This document is reserved and must be given in Switzerland exclusively to Qualified Investors as defined by the Swiss Collective Investment Scheme Act of 23 June 2006 (as amended from time to time, CISA).

S&P Global recently hosted their inaugural flagship Sustainable1 event, ‘Accelerating the Transition to Sustainability’, during which François Millet, Lyxor’s Head of ETF Strategy, ESG & Innovation shared his thoughts in a panel on ESG labels and how they can help avoid greenwashing. Read on for some edited highlights, or watch the full replay.

Panel agenda

  • What are the key considerations in product labelling? 
  • What can we learn from the EU Sustainable Finance Disclosure and Taxonomy Regulations? 
  • 2nd party opinions and avoiding greenwashing 

Speakers

  • Lauren Smart, Chief Commercial Officer, ESG, S&P Global Sustainable1 (moderator)
  • Victor Van Hoorn, Executive Director, EuroSif
  • François Millet, Head of ETF Strategy, ESG and Innovation, Lyxor
  • Manjit Jus, Managing Director, Global Head of ESG Research & Data, S&P Global

Watch the full replay to learn more about investment labels, or read edited highlights below



Victor Van Hoorn on the state of European sustainability regulation 

Victor: “I think in the last couple of years, the EU and the European Commission has definitely taken a leadership role in this place. (…) That all stems from the post Paris Agreement on climate where it was obvious that we needed to leverage private finance besides public finance if we ever wanted to reach the climate neutrality goals. (…) In Europe there’s really two pieces of legislation that emerged. One was the much talked about EU Taxonomy which tries to come up with a classification system of economic activities that are aligned with the climate goals of climate neutrality. So in a way it seeks to define ‘green’, seeks to establish a harmonised consensus view of what we consider as sustainable enough or ‘green’ enough. (…) That’s complemented by the whole Sustainable Financial Disclosure Regulation, or SFDR, which is fast on track to revolutionise the market. (…) On the one hand it asks fund products that make promises around ESG or sustainable investment to disclose much more on the risk side of the equation, which is “explain to us how your investment portfolio is hedged or able to withstand risks that may be resulting from material ESG factors”. That’s one side. But the novelty I guess here is that it starts to also address the other side of materiality, which is more the impact question, where I think there has been much talk about the so called Principal Adverse Impact Indicators.”

François: “The ETF industry in Europe totals €1.1trn, and out of this, 12% are ESG ETFs (€130bn). But for net new assets it’s a different story – ESG ETFs represent 50% of the new assets gathered in the market, so it’s really a big transformation of the ETF market. What I can say and report is that the Disclosure Regulation which has been highlighted by Victor has been essential. (…) The classification of our products between products which are just promoting ESG characteristics and products which are more actively proposing sustainable investment objectives has been absolutely key. In the ETF space in Europe, less than 5% of the products are so called ‘Article 9’, the most demanding level. (…) We needed it to comply with three different frameworks for our products. The first one is European regulation, including Taxonomy regulation and of course Benchmark regulation for index products and Disclosure regulation (SDFR). The second one is the doctrines of local and domestic regulators who are willing to go further in specifying the constraints. In some countries like France for example we need to demonstrate the materiality of the ESG screening of the products, so the European regulation is not enough to get there. And thirdly, the labels. The labels are initiatives coming from various countries. They are so far domestic, and not only are they country specific, but they are not harmonised around Europe. So we are trying of course to build products, and sometimes we are negotiating with index providers to make sure they are integrating in the methodology of the indexes the criteria so that we are eligible to as many local labels as possible, but also to the European regulation of course.”

Manjit: “I think with regulation coming in Europe on what companies should be disclosing, and frameworks like TCFD offering a bit more guidance on the environmental pieces, that helps frame it. But certainly, a lot of the level of depth, if you really dig into it, will be required to meet the regulators’ needs. On the investors’ side (…) they can be quite in depth, at a very granular level in such a way that companies themselves may not have thought about in the past. (…) I also think this is an opportunity to really connect investors with companies, and bring them together around information that is necessary, because regulators are asking for it, and because hopefully it will drive more consistency and hopefully move the needle forward. I think this has an opportunity to shape the way companies are disclosing certain pieces of information, compared to some of the disaggregation and misalignment we’ve had in the past with different reporting standards that existed for companies that were not necessarily focused on investors.”

Lyxor has been active on the labelling front, with many of our ETFs being either SFDR 8 or 9 compliant, or having received ESG labels. We know sustainability criteria matter to you, and we’re doing everything we can to help avoid ‘greenwashing’.

We’re happy to report that two more ETFs in our ESG range recently received the official SRI Label:

This adds to our growing list of ESG credentials, including the SRI Label for our MSCI Europe ESG Leaders (DR) UCITS ETF and our MSCI EMU ESG Leaders Extra (DR) UCITS ETF, and the Greenfin Label for our flagship Green Bond (DR) UCITS ETF.

Watch this space as we continue with our ESG fund labelling programme throughout 2021 and beyond!

Key risks of Lyxor ETFs

It is important for potential investors to evaluate the risks described below and in the fund prospectus which can be found on lyxoretf.com

CAPITAL AT RISK: ETFs are tracking instruments: Their risk profile is similar to a direct investment in the Underlying Index. Investors’ capital is fully at risk and investors may not get back the amount originally invested.

REPLICATION RISK: The fund objectives might not be reached due to unexpected events on the underlying markets which will impact the index calculation and the efficient fund replication.

COUNTERPARTY RISK: With synthetic ETFs, investors are exposed to risks resulting from the use of OTC swaps. In-line with UCITS guidelines, the exposure to a swap counterparty cannot exceed 10% of the total fund assets. Physically replicated ETFs may have counterparty risk if they use a securities lending program.

UNDERLYING RISK: The Underlying Index of a Lyxor ETF may be complex and volatile. When investing in commodities, the Underlying Index is calculated with reference to commodity futures contracts exposing the investor to a liquidity risk linked to costs such as cost of carry and transportation. ETFs exposed to Emerging Markets carry a greater risk of potential loss than investment in Developed Markets as they are exposed to a wide range of unpredictable Emerging Market risks.

CURRENCY RISK: ETFs may be exposed to currency risk if the ETF is denominated in a currency different to that of the Underlying Index they are tracking. This means that exchange rate fluctuations could have a negative or positive effect on returns.

LIQUIDITY RISK: Liquidity is provided by registered market-makers on the respective stock exchange where the ETF is listed, including Societe Generale. On exchange liquidity may be limited as a result of a suspension in the underlying market represented by the Underlying Index tracked by the ETF; a failure in the systems of one of the relevant stock exchanges, Societe Generale or other market-maker systems; or an abnormal trading situation or event.

CONCENTRATION RISK: Some ETFs, e.g. thematic and Smart Beta ETFs, select stocks or bonds for their portfolio from the original benchmark index. Where selection rules are extensive it can lead to a more concentrated portfolio where risk is spread over fewer stocks than the original benchmark.


IMPORTANT INFORMATION

This document has been provided by Lyxor International Asset Management that is solely responsible for its content.

Fund name Subfund name Country of domicile
MULTI UNITS LUXEMBOURG

Lyxor MSCI World ESG Leaders Extra (DR) UCITS ETF - Acc

Luxembourg
MULTI UNITS LUXEMBOURG Lyxor MSCI USA ESG Leaders Extra (DR) UCITS ETF - Acc Luxembourg
MULTI UNITS LUXEMBOURG

Lyxor MSCI Europe ESG Leaders (DR) UCITS ETF - Acc

Luxembourg
MULTI UNITS LUXEMBOURG

Lyxor MSCI EMU ESG Leaders Extra (DR) UCITS ETF - Acc

Luxembourg
MULTI UNITS LUXEMBOURG

Lyxor Green Bond (DR) UCITS ETF - Acc

Luxembourg

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This research contains the views, opinions and recommendations of Lyxor International Asset Management (“LIAM”) Cross Asset and ETF research analysts and/or strategists. To the extent that this research contains trade ideas based on macro views of economic market conditions or relative value, it may differ from the fundamental Cross Asset and ETF Research opinions and recommendations contained in Cross Asset and ETF Research sector or company research reports and from the views and opinions of other departments of LIAM and its affiliates. Lyxor Cross Asset and ETF research analysts and/or strategists routinely consult with LIAM sales and portfolio management personnel regarding market information including, but not limited to, pricing, spread levels and trading activity of ETFs tracking equity, fixed income and commodity indices. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and reports. Lyxor has mandatory research policies and procedures that are reasonably designed to (i) ensure that purported facts in research reports are based on reliable information and (ii) to prevent improper selective or tiered dissemination of research reports. In addition, research analysts receive compensation based, in part, on the quality and accuracy of their analysis, client feedback, competitive factors and LIAM’s total revenues including revenues from management fees and investment advisory fees and distribution fees.

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