Feedback of "Sustainable Inclusive Solutions" on the proposal for the “establishment of a framework to facilitate sustainable investment"
The idea behind the proposal is to encourage green and social investments, ensuring credibility and comparison across the market. This is a completely appropriate course of action, but it might not provide enough incentives to reallocate current investments from unsustainable activities to sustainable ones.
The momentum requires also appropriate measures to support divestments from "brown economy", including because their financial results tend to be gradually worse, due to both physical (climate-related) and regulatory environmental risks. So, I suggest the creation of a classification of environmental risk level of corporate investments, according to the following relevant criteria: a) economic sector of the invested company; b) compliance with environmental and social rules; c) ESG (environmental, social and governance) performance (compared to industry peers); d) geographical area of the financed activities (what might include not only the value/sensitivity of the local environment, but also the level of the environmental enforcement, as it is highly heterogenous across countries and even regions of the same country). Values of investments should not be considered for two reasons: 1) it hides aggregated impacts deriving from a number of small investments; 2) values will necessarily be considered when assessing the risk level of the whole portfolio, both in terms of percentage and absolute figures.
There should be at least four different categories: a) high risk investments; b) medium risk investments; c) low risk investments; d) positive impact investments. Maybe this last one could be divided according to the degree of impacts (high and low, for example).
This classification would be useful for many purposes: a) definition of periodicity of monitoring of ESG risks; b) monitoring of portfolio risk by each investor; c) monitoring of systemic risks by regulator/supervisor (prudential supervision). The latter is only possible if the classification is based on criteria defined by the regulator itself – it is not feasible if each investor has its own classification. Moreover, institutional investors and asset managers might be required to disclose the risk classification of investments across their portfolios, which is a relevant information for a number of stakeholders.
With my respectful regards,
Luciane Moessa de Souza
PhD; Attorney at law, consultant and professor, managing partner of Sustainable Inclusive Solutions; civil servant at Central Bank of Brazil (currently on leave without pay)
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