Karen Degouve (H.94) is Head of Sustainable Finance at the French Banking Federation (FBF). Prior at Natixis for more than 15 years, she held key roles in climate finance and impact investment. Her responsibilities included developing sustainable financial products and managing transversal initiatives, including the flagship Green Weighting Factor to support the origination of green financing. She also managed for 7 years the European Carbon Fund, a pioneer climate investment fund dedicated to clean energy and infrastructure projects reducing greenhouse gas emissions. Before joining Natixis, Karen worked in project finance for the Middle East and Africa energy sector and earlier in emerging capital markets.
Can you explain your role as the Head of Sustainable Finance at the French Banking Federation?
My role is to coordinate the work of French banking groups to collectively develop sustainable finance, covering climate action, transition, and adaptation, nature-related issues, environmental, social, and governance (ESG) risks, sustainability reporting, as well as coordinating advocacy and engage with public authorities and stakeholders on all existing and emerging sustainable finance regulation. I also represent French banks on sustainable finance issues with relevant national, European, and international initiatives and bodies, including at events like climate and biodiversity UN conferences (COP). In addition to my work at the federation, since 2021, I have been co-leading the implementation work of the industry-led and UN-convened Net Zero Banking Alliance (NZBA), which brings together over 140 banks worldwide committed to aligning their lending and investment portfolios with net-zero carbon emissions by 2050.
What challenges do you face in developing a profitable business that does not transgress planetary boundaries?
Since the Industrial Revolution, our global economy has developed with the belief that growth, exclusively measured by the rate of change in GDP, was not bounded by any limitation. As a result, economic growth has historically been tied to increasing greenhouse gas emissions and the unlimited use of natural resources, hence triggering global warming and nature's degradation beyond tipping points. Now, thanks to environmental science, we have collectively come to understand that the double crisis of nature loss and climate change threatens not only economic growth but even long-term human survival. If we want to survive in the long run, we must engage in radical and far-reaching changes in order to decouple economic growth from carbon emissions and negative impacts on nature and ultimately maintain growth within the limit of planetary boundaries. This includes changing consumption habits, developing a circular economy, switching from fossil fuels to low-carbon energy sources, shifting away from manufacturing to less carbon-intensive service-based industries, developing low-carbon infrastructures... Those changes must be engaged urgently, they require both massive investments and strong public policies. We collectively know that now, but despite this belated awareness, moving away from the economic model that has prevailed for the past 200 years remains challenging.
At a company level, developing a sustainable business activity involves navigating several challenges. Companies must reconcile profitability with the imperative to minimize environmental impact, but transitioning to sustainable practices often requires significant upfront investments which can be prohibitive, especially for small and medium-sized enterprises without access to substantial capital. Developing or adopting new technologies that are both sustainable and effective can be a significant hurdle, as the pace of technological innovation may not always match the urgency of sustainability goals. Ensuring sustainability across value chains is also a significant challenge: companies must ensure their suppliers adhere to sustainable practices, which can be difficult to monitor and enforce, especially in global supply chains with varying standards and regulations. As demand for sustainable resources grows, securing supply can be difficult. On the demand side, while consumer demand for sustainable products is growing, not all consumers are willing to pay a premium for such products. Building demand for sustainable options can be a slow and challenging process, especially in a competitive market where competitors may offer lower prices by not internalizing environmental costs.
Navigating the evolving regulatory landscape for sustainability is also a key challenge: new policies, standards, and regulations are being developed, especially in Europe, which can complicate long-term planning and require adaptations from companies to remain compliant. This is particularly true in the EU regarding sustainability reporting: with the Corporate Sustainability Reporting Directive (CSRD) coming into force next year, companies must increasingly navigate the complexities to provide transparent and credible accounts of their sustainability efforts. Finally, shifting towards more sustainable models often requires leadership, employee engagement, and a significant change management effort in order to achieve the necessary cultural and organizational changes. Those are the main challenges I see companies facing in developing more sustainable business models.
I am convinced that financial institutions—banks in particular—have an essential role in supporting businesses in financing the transition to a more sustainable and resilient global economy.
I am convinced that financial institutions - banks in particular - have an essential role in supporting businesses to overcome those challenges and, more generally, financing the transition to a more sustainable and resilient global economy. Financial institutions also face challenges of their own to reconcile long-term sustainability objectives (including net zero by 2050 commitments) with short-term profitability expectations from the market, but they are nevertheless increasingly incorporating environmental and social considerations in their risk management and decision-making processes, evaluating the sustainability impact of their activities alongside traditional financial metrics. This is particularly true in the EU where sustainable finance regulation is essential to the Green Deal.
How do you make sure that the sustainable businesses you are supporting will not bring unwanted consequences, like businesses as usual?
Ensuring sustainable businesses do not bring unwanted consequences requires conducting comprehensive environmental and social impact assessments (ESIAs) before supporting any company, project, or asset. These assessments are intended to identify and develop strategies to mitigate potential negative impacts. Continuous monitoring and evaluation of the business operations are crucial to identify and address any adverse effects when they emerge. Engaging with stakeholders, including local communities, environmental groups, and experts, can provide valuable insights and feedback to help avoid or minimize negative impacts. Adopting a holistic approach that considers the interconnections between environmental and social factors is also essential.
Major banks have used a risk management framework known as the Equator Principles over the past 20 years to determine, assess, and manage environmental and social risk in project finance. It primarily intends to provide a minimum standard for due diligence to support responsible risk decision-making. The global banking sector developed it as a voluntary standard based on preexisting environmental and social policy frameworks established by the International Finance Corporation. Today, banks that apply this voluntary standard cover most international project finance debt in emerging and developed markets.
In 2020, EU regulators introduced the Do No Significant Harm (DNSH) principle as a cornerstone of the EU’s new sustainable finance framework. Regulations such as the Sustainable Finance Disclosure Regulation (SFDR), the taxonomy for sustainable activities, and the Benchmarks Regulation all refer to it with different nuances. It is intended to prevent investment processes that would focus on a particular environmental or social objective from significantly harming other such objectives. This is particularly important as increasing net zero targets means that financial institutions tend to focus on the carbon footprint of companies, sometimes at the expense of other important environmental and social data sets such as water, waste, biodiversity, or social impacts. DNSH will help ensure that companies doing well on one environmental aspect meet a minimum baseline standard across others. Similarly, EU regulators have introduced the principle of Minimum Social Safeguards in several regulations, including the Taxonomy. Consequently, EU financial institutions have developed ESG assessment tools, but in practice, however, determining how to apply these principles remains complex for investors to date.
What do you recommend to the new graduates from business schools?
I would like to remind new graduates that there is indisputable scientific evidence that 6 of the 9 planetary boundaries have now been transgressed, meaning the environment may not be able to self-regulate anymore, and that they are the last generation that can do something about it. Urgent action is needed from all governments, companies, and individuals. Young graduates can act at all three levels, particularly from within the organizations they decide to join after leaving business school. They can (re)align business with planetary boundaries by advocating for sustainable practices that prioritize long-term environmental stewardship over short-term gains within companies. They can leverage their knowledge to drive change at all levels: be responsible consumers, adopt green technologies, push for sustainable supply chains, influence their organization’s strategy, actively advocate public decision-makers… They are tomorrow’s leaders, so they should lead by example in their professional and personal lives. In summary, I recommend they take action everywhere, all at once!
What do you recommend to the investors, whether they are citizens, institutions, or corporations?
Investors should only support economic activities that are viable in the long term, environmentally sustainable, and socially responsible. I am convinced that investors who fail to include environmental and social considerations in their decision-making process will lose value in the long run. So even if they do not care about contributing to the transition towards a more sustainable and resilient economy for ethical reasons, they should simply do it because it is financially wise. I strongly encourage all investors to require full transparency from their financial advisers, particularly retail investors who historically have failed to do so. In the EU, the Sustainable Finance Disclosure Regulation was introduced three years ago to improve transparency in the market for sustainable investment products, prevent greenwashing, and increase transparency around sustainability claims made by financial advisors.
It was a great step forward, but unfortunately, to date, retail investors have not fully benefitted from this increased transparency due to a complex implementation, the lack of clear definitions of what “sustainable investment” actually means, data issues, and the lack of customer understanding. The regulation is expected to be improved in the coming years, but in the meantime, it is essential that retail investors also take action. Be curious, ask questions about investment processes, exclusions, if and how impacts are measured, if and how ESG-related risks are identified and mitigated, if planetary boundaries are taken into account. It is investors’ demand that drives change, so the more investors ask for sustainability, the more asset managers will invest responsively, and the more distributors will select responsible products over those that are not.
At HEC Paris, new research on impact investing shows that investing in brown companies can be more impactful than investing in green companies. Based on your experience, can you relate to those strategies?
(Find the research in Finance by Stefano Lovo and Augustin Landier explained on Knowledge@HEC here.)
I believe both investing in "brown" companies (those with significant negative environmental impacts) and investing in "green" companies (those focused on environmental sustainability) can have an impact on environmental sustainability or financial returns, and both should be done.
Green companies often operate at the forefront of sustainability, offering innovative solutions to environmental challenges. Investment can accelerate their growth, scalability, and the development of new technologies. It can also send signals to the market about investor priorities, therefore encouraging more companies to adopt sustainable practices.
By investing in brown companies, such as those operating in carbon-intensive sectors, investors can push for strategic changes by engaging with management on sustainability issues through direct dialogue and shareholder resolutions (including say-on-climate). Investments can also be made conditional on clear commitments to sustainability targets, such as reducing carbon emissions, investing in clean technologies, or improving environmental, social, and governance practices. Brown industries often require significant capital to shift towards greener operations. By providing transition finance, investors support these companies in adopting sustainable technologies and practices, which can substantially reduce environmental impacts.
My past experience in managing an impact fund (at a time when it was not yet called an "impact fund") makes me believe a fund’s investment strategy entirely depends on the objective pursued by investors: if the goal is to support the transition, then investing in companies with the highest negative environmental impact today, but with ambitious transition plans to transform their activity over time, can be highly impactful.
However, investing exclusively in green activities may be more aligned if investors’ objective is to support innovation and have an immediate positive environmental contribution. Ultimately, a balanced approach that leverages both the potential for transformation in brown companies while supporting the growth and innovation of green companies could be a strategic way to maximize environmental impact.
In my previous role at Natixis, I managed a transformational initiative called the Green Weighting Factor for the corporate and investment bank. It included a comprehensive evaluation of the past, present, and future environmental impact of each company being financed, and the rating resulting from that evaluation, which took the form of a color on a 7-level scale from brown to green, was used to inform credit decisions. It has always been obvious that financing the development of green companies and the transition of brown ones were both extremely useful strategies for reaching sustainability targets.
Another recent research unveils three investment options to foster the adoption of renewable energy in Europe. Can you share your reactions to those findings?
(Find the research in Operations Management by Andrea Masini and Sam Aflaki explained on Knowledge@HEC here.)
I definitely agree that European member states should implement a multifaceted approach to renewable energy policy and investment to finance both short-term and secure long-term market growth. Actually, this multifaceted approach should cover all low-carbon sources of power generation, including nuclear, in addition to renewables, as there is a need for substantial electrification across sectors to reduce direct demand for fossil fuels.
Government support for low-carbon energy in Europe must address both supply and demand. This involves developing demand-pull incentives for households and enterprises, as well as policies to both stimulate technology innovation and create resilient at-scale supply chains for technologies that are already available and mature. Economic stimulation directed towards the supply side should cover both power generation and the energy grid infrastructure to support the integration of renewables.
Another piece of research highlights that the disparity of ESG disclosure standards allows polluting companies like TotalEnergies to pick and choose from a menu of standards, enabling them to greenwash. How do you face this ESG uncertainty when identifying companies to support/invest in?
(Find the research in Accounting by Hervé Stolowy and Luc Paugam explained on Knowledge@HEC here.)
Yes, to date the lack of standardized ESG disclosure standards has occasionally led to greenwashing. Some companies may use this disparity to present their environmental performance more favorably than it actually is, misleading stakeholders about their true environmental impact. This inconsistency in reporting standards makes it challenging for investors and consumers to compare companies’ sustainability practices accurately and can undermine efforts to promote genuine environmental responsibility.
Despite the lack of convergence, reporting standards, by increasing transparency, are a major lever for accelerating the ecological and social transition on a global scale.
But by increasing transparency, reporting standards are also a major lever for accelerating the ecological and social transition on a global scale. I strongly believe that regulations such as the EU's Corporate Sustainability Reporting Directive (CSRD) and its 12 standards will drastically reinforce the robustness and comparability of companies’ sustainability reporting over time and, therefore, better guide European economies on the rails of transition. With CSRD, each company will report on the consequences of environmental and social upheavals on its financial performance (financial materiality) but also its positive or negative impacts on the environment and people, as well as its dependencies on the environment (impact materiality). Companies will need to report not only on their own activities but also on their entire upstream and downstream value chain. The 12 standards developed to date cover all ESG topics: climate, pollution, water, biodiversity and ecosystems, circular economy, internal workforce, value chain workers, affected communities, consumers, and end users, as well as ethics and good business practices. This will be extremely useful for financial institutions to drive both sustainable investment and transition finance.
Once again, the EU was a pioneer on the sustainability front. But it cannot win this battle alone, and interoperability between the EU sustainability reporting standards and international ones is key. Hopefully, cooperation between the EU and international standard setters such as the IFRS should enable change. I believe that the simple materiality advocated by IFRS - requiring companies to report only on the consequences of environmental and social upheavals on their financial performance - no longer has a future. Last week, China's three main financial centers, Shanghai, Shenzen, and Beijing stock exchanges, have published guidelines requiring large listed companies to disclose their sustainability data. Their ESG reporting standard, like CSRD in Europe, is based on the double materiality (financial and social impact) principle.
