5 questions to Benjamin Herzog, Director of Scientific Portfolio (an EDHEC Venture)

What is the mission of this new start-up, which has grown out of EDHEC's impact research culture?

Benjamin Herzog : For more than 20 years, EDHEC's impact strategy has consisted of transferring academic tools and concepts to players in the financial industry in order to respond to the concrete problems they have to deal with, when faced with investment choices.

Most investors are perfectly familiar with certain academic principles, such as adopting an approach based on risk and not on past performance; and yet, in practice, it is past performance that often takes precedence in this type of decision. One possible explanation is that it is difficult to assess risk: investors are therefore forced to use tools provided by suppliers, which often suffer from "confirmation bias" (”I say I do ESG, my fund has performed well, so ESG has performed well ’... the logical error is obvious, yet irresistible!).

How does your fintech platform change the game?

The platform we developed during our incubation at EDHEC finally gives decision-makers the tools to do what they have often known for a long time, without ever having had the means to put them into practice.

They can finally ignore past performance and base their investment decisions on richer, more reliable information, namely risks and their diversification; they can finally evaluate an investment in the context of their existing portfolio instead of judging it on its own (which is absurd, especially if you're looking for diversification); they can finally assess a climate fund from the perspective of a comprehensive climate alignment strategy and not simply on the basis of a measure of its past decarbonisation; they can finally judge a sustainable investment portfolio on the basis of what it contains and not what its provider says about it.

These last ESG-related themes make the task even more complex, because while everyone pretty much agrees on the value of controlling a portfolio's risk, there are as many extra-financial impact objectives as there are investors; an approach that allows investors to experiment directly and build a portfolio using a dedicated approach has therefore become essential.

You seem to be saying that sustainable investment can only be done à la carte, is that realistic?

No, of course not. Our role is to provide a solid and accessible framework to enable investors to design and implement a sustainability and climate alignment policy.

Take the example of a financial player wishing to translate an objective of gradual decarbonisation of the economy into its investments: he could naively construct his portfolio in such a way as to reduce his carbon footprint (usually represented by the CO2 emissions needed on average to generate €1M of income) by all possible means. This could lead them to progressively exclude certain sectors such as transport or the manufacture of basic materials (concrete, steel, plastics), even though it is crucial to finance their transformation rather than cutting off investment!

The aim of the research work carried out by our team is to reveal the pitfalls and misconceptions inherent in climate investment, which threaten many investors who are obliged to make far-reaching changes to the way they invest in too short a time.

We often hear the term ‘greenwashing’ used, which has a negative connotation, but as far as end investors are concerned, this is undoubtedly the result of a certain haste and a lack of independent tools. It's the sign of a market that seems to have woken up - and that's all to the good! - but the time has come to establish a consensual framework based on serious research. This is the purpose of the EDHEC Risk Climate Impact Institute, for example, with which Scientific Portfolio (an EDHEC Venture) - fortunate to have been born in this ecosystem - maintains close links.

How does your research on sustainable investment challenge existing financial models?

In the field of sustainable investment, we need to be aware of the multiplicity of objectives, as shown by the multicoloured checkerboard representing the 17 Sustainable Development Goals of the UN framework, which is only the tip of the iceberg!

One of the most important messages to emerge from our recent work is that all these objectives are not necessarily compatible with each other. In other words, choices will have to be made, for example, between ambitious climate or ESG objectives. These choices are complex, partly because investors need to be able to strike a balance in a multi-dimensional problem, and partly because part of the industry is seeking to preserve existing investment models. This is normal, as it is in their economic interests, but it suggests that it is possible to build a sustainable, climate-aligned portfolio while remaining extremely close to existing market indices (or benchmarks).

American and European regulators have not been fooled by this, and neither have some investors, who have obtained the removal of various ESG labels from the names and descriptions of many investment funds.

This approach seems to give you a certain amount of optimism?

That's right! The work of Vincent Bouchet and Aurore Porteu de la Morandière (available on EDHEC Vox here and here) shows that it is possible to design an effective sustainable strategy based on the ‘do-no-harm’ principle while respecting reasonable constraints on financial deviations.

This is something. The ‘do-no-harm’ principle, even if it may seem anecdotal, is consubstantial with the very idea of sustainable development and has already helped to move some lines: for example, the directors of Total Energies and Shell recently announced that they were considering moving their main listing to the United States because European investors were becoming scarce by virtue of this principle.

The platform proposed by Scientific Portfolio (an EDHEC Venture) will enable investors to carry out their own experiments and find the compromise that is most consistent with their investment policy. It's a real paradigm shift - and one that also gives cause for optimism in answer to your question! As we enter a new phase for our fintech, we're delighted to be able to start welcoming a wide audience of investors to the platform and putting these ideas into practice.