Criticism from the Institut de la Finance Durable, narrow adoption of the text on nature restoration, financing the ecological transition, labels and SFDR classification, slowdown in fundraising, projects and developments in the non-listed sector...Philippe Zaouati, Managing Director of Mirova, answered questions from Finascope. An interview accessible to non-subscribers.

Philippe Zaouati, the Institut de la Finance Durable came into being around 6 months ago. You have been critical of this organization, which has replaced Finance For Tomorrow. What do you find fault with it?

I've long been in favor of a strong sustainable finance initiative in Paris. The example for me is what has been happening in London for the past 10 years with the Green Finance Institute, which seems to me to be the right model, i.e. an institute focused on sustainable finance issues, very committed, very connected to the ecosystem. For many years now, I've been calling for such an institute to be set up in France. If, along with others, I expressed reservations when the Institut de la Finance Durable was created, it was to criticize a method. We were replacing the Finance For Tomorrow initiative, which was very dynamic and had international visibility. Finance For Tomorrow, which I had helped to create, had a vision that was far ahead of the market on a number of subjects, particularly on issues that went beyond climate change, such as biodiversity, just transition, etc. The transition and change of governance were, in my opinion, the most important issues. I found the transition and change of governance surprising and a little hasty.

What do you think prompted this change? And what does it really change?

You have to ask those who decided to make the change. I didn't quite understand the difference between the two initiatives and why it was necessary to change governance, but that's in the past. Today, I want to look at the results. The context is much more global. After being microscopic for 5 or 10 years, sustainable finance has become a mainstream issue. But in the last year or two, we've seen a pendulum swing in the other direction, with very strong attacks in the United States, but also in Europe. Some of these attacks are frontal, while others claim that green finance should be set aside in favor of more vague financing of the transition. There is a clear desire to weaken sustainable finance on the part of the proponents of "business as usual". This resistance was again demonstrated by the text on nature restoration, which was narrowly adopted last week by the European Parliament. Many economic players have a vested interest in slowing down regulation. But talk of a regulatory pause or a halt to the Green Deal makes no sense. We can't afford a regulatory pause.

If I were offered a role, as is the case in several French and international organizations, I would of course consider it with interest.

Do you really think that the leaders of the Institut de la Finance Durable (IFD) are intent on weakening this cause? And would you be prepared to accept a position of responsibility within the IFD, in order to help change things?

In no way do I want to make this a people issue. The Institut de la Finance Durable is staffed by top-quality professionals. The issue is systemic. There's a temptation in the industry to undercut and stay in a slower dynamic. I don't want to put the Institut de la Finance Durable on trial either. If tomorrow, the institute publishes a report in line with what I think, I'd be very happy to support it, and if I were offered a role, as is the case in several French and international organizations, I would of course consider it with interest.

What do you take away from the IFD's recent report on financing the ecological transition?

The only really new point, it seems to me, is the proposal to create an "ecological transition" label (conceived, according to the report, as a classification of transitional finance and not just as a label for a savings product.). But, in my opinion, we need to start by bringing order to the two existing labels, the SRI label and the Greenfin label, and ensuring that they are managed in a coordinated and coherent way. If the "base label", i.e. the SRI label, is sufficiently ambitious, we could imagine adding specific elements to it, such as a green label or a transition label. The first step must be to clarify existing labels.

Would you be in favor of a single label and greater consistency with SFDR regulations?

I'm not in favor of a single label, but of a multi-level label that would correspond to SFDR. For example, there could be a base label, corresponding to what article 8 funds are, to put it simply, and above that, specific, more committed labels classified under article 9, which could be an impact label, a climate label or a transition label. Greenfin could be one of these more ambitious labels. Correspondence between the labels and the SFDR classification would certainly clarify for the market what a sustainable investment is.

My main concern was that an overly precise definition would lead most fund managers, including Mirova, to withdraw their funds from Article 9. 

Why didn't the European Commission clearly define what a sustainable investment was when it set up SFDR? 

The European Commission was right not to define strictly and precisely what sustainable investment means. I believe it would have reached an impasse, due to a lack of tools and consensus. If the European Commission were to define what responsible investment means, it would be deciding for the asset manager what should and shouldn't be included in portfolios. I think this would be excessive, and that it would be preferable at this stage to demand transparency and let asset managers describe their own vision of the world and of transition. My main concern was that too precise a definition would lead most asset managers, including Mirova, to withdraw their funds from Article 9. The label mechanism is different, as asset managers retain the freedom to choose whether or not to be labeled.

Aren't labels also a way of keeping management within fairly precise limits?

It all depends. Today, the regulations stipulate that funds can claim to be article 8 or article 9 funds once they have defined responsible investment and declared that their portfolio corresponds to this vision. But no audit is carried out, either to verify the existence of this definition, or to ensure that the portfolio corresponds to it. A label would have the merit of carrying out such an audit.

Do you think the suspicions of greenwashing stem from this lack of auditing?

Yes, in part. The other advantage of labels is that they allow greater adaptation to market developments, whereas regulations set the framework but cannot adapt as quickly. Regulatory revisions take several years, sometimes 10, after their first version. The world moves much faster.

The European regulatory framework has been widely criticized for putting the cart before the horse, with the CSRD reporting requirements for companies coming after those for investors (SFDR). Do you share this view?

In theory, yes. In fact, the opposite was expected. The political vagaries and mandates of the European Parliament meant that SFDR was easier to push through at the end of the MEPs' previous term. The CSRD directive had to be postponed until the following term. This means that for a year or two, we'll have trouble filling in our SFDR reports in a very clear way, and above all that we're calling for consistency between the two directives, particularly as regards climate reporting requirements. 

At this stage, the new MiFID provisions are a semi-failure. It's a pity, because the initial idea was a good one.

How do you fill in the data you don't have?

With estimates. This is nothing new, it's what we've been doing for a long time to calculate the carbon footprint of our portfolios. Today, we don't have exhaustive data on companies' carbon footprints. So we work with data producers who make estimates. This is not a serious problem. Absolute data accuracy is a bit of a dream. The important thing is to have consistent measurements that enable us to make informed decisions. Incidentally, the data improves a lot from one year to the next.

In a recent report on the commitment of asset management companies, the AMF highlighted the sharp rise in the cost of extra-financial data. Do you agree with this observation? What is the trend in the cost of extra-financial data at Mirova?

ESG data costs have roughly doubled in 5 years. But do you know how much financial data costs? Does a company ever ask itself how much its accountant, treasurer, CFO, statutory auditor and management control software cost? Today, we're going to have to do the same with non-financial data. It may one day cost as much as financial accounting, but it's part of what's needed for tomorrow's economy to function properly. It's the same for asset managers. The cost of Bloomberg or Factset monitors, or of index providers such as MSCI or Standard & Poor's, in a quasi-monopolistic situation, has also exploded in recent years. Environmental data is only a small part of the story.

The entire regulatory framework is still considered unconvincing or too vague by savers. What efforts need to be made in this direction?

At this stage, the new MiFID provisions are a semi-failure. It's a pity, because the initial idea was a good one. It is essential that advisors discuss their environmental and social preferences with their clients. Unfortunately, the implementation of the MiFID directive is too complex, with questions that are incomprehensible to the average person. We need to take a step back, without abandoning the idea, by asking simpler questions. In addition, certain savings products have been misused, such as the Livret de Développement Durable et Solidaire (LDDS), which is not sufficiently clear. We need greater clarity.

At the halfway point in 2023, we are just under 1 billion, but net inflows remain positive, which is rather atypical in an extremely difficult market. 

At the end of last week, the French government announced that it was aiming to direct more of the funds collected by the LDDS towards the ecological transition...

First of all, we need to recall the current context, which is one of a massive influx of money into passbook savings accounts, particularly the Livret A. This is not necessarily good news for financing the ecological transition. The Livret A is mainly used to finance social housing, its historical objective. The LDDS is supposed to be geared towards sustainable development. Part of the funds is centralized at Caisse des Dépôts (CDC), while the rest remains on the banks' balance sheets. The part centralized at CDC is, I think, rather well managed in terms of sustainable development. The real issue is the part that remains on bank balance sheets. I understand that the government wants to increase pressure on the banks, but this is happening at a time when they are also under pressure from rising interest rates and falling mortgage volumes.

Is this appetite for passbook savings helping to slow the flow of subscriptions to your funds?

Inflows to the market as a whole have indeed slowed, but the rise in passbook rates is only one of the reasons. Nevertheless, we're suffering a little less than the others, since the part of the market that's faring best is Article 9 funds. Our positioning gives us a slight advantage.

What is the proportion of this slowdown?

At Mirova, we had exceptional years in 2020 and 2021, with 6 billion in new money two years in a row. New money reached 3 billion in 2022. At mid-year in 2023, we're at just under 1 billion, but net inflows remain positive, which is rather atypical in an extremely difficult market. 

What sets you apart from other asset management players?

Our commitment is total. That's what sets us apart. We feel invested with a mission, which is to put financial innovation at the service of sustainable development and the general interest. In fact, we have become a "mission-driven company". Of course, we have a very strong focus on environmental and social impacts, with a 20-strong ESG team that feeds into all our management, with a clear sector bias. But we also apply this conviction to everything we do, by engaging with public authorities, companies and our peers, by participating in research on impact measurement methodology and biodiversity, and by contributing to international bodies such as the TNFD (Taskforce on Nature-related Financial Disclosures). We are also expanding into sectors where other asset managers have little presence. We currently have 1 billion euros invested in agricultural and energy transition in developing countries. It's this global vision that makes us different.

We are seeking a balance, with the aim of having 20 % of our outstandings and 40 % of our income from private assets

What are your plans for 2023?

We are continuing to expand in both listed and private assets. Last year, we acquired SunFunder, which finances the energy transition in Africa and developing countries. We now employ 25 people in Nairobi, and we plan to accelerate further in emerging markets. In Asia, we will be expanding from our Singapore office, where we will soon have a team of around ten people. We will also continue to develop our energy transition infrastructure franchise, with the launch by the end of the year of our 6th vintage, which will be at least as ambitious as the previous version. 
Our natural capital platform is also enjoying strong momentum. We have entered into partnerships with companies committed to the transition, such as Orange, L'Occitane, Kering and L'Oréal, to finance projects to restore nature and ecosystems. Lastly, a year and a half ago, we launched our private equity fund with a capital raising that should be completed by the end of the year.

Has the rise of private equity in corporate financing, to the detriment of the stock market, prompted you to rethink your product range?

We are seeking a balance, with the aim of having 20 % of our assets under management and 40 % of our revenues in private assets (infrastructure, private equity, natural capital, private debt...). We are currently at around 30 %. In recent years, there has been a sharp shift from listed to unlisted assets, and we have seen a strong temptation for companies to use private equity to finance themselves. This movement has calmed down somewhat, and the "unicorn bubble" has deflated. This focus on valuation was exaggerated. What's important for us is to be present across the entire financing chain to capture and support innovation, even if we remain aloof from very specific segments such as early venture capital. Equity and bond markets remain essential sources of financing for the economy, and we are convinced that our actions as a responsible investor also have an impact there.