Global climate targets need valuable and concrete opportunities that meet investors’ appetites. It seems like an inevitable correlation and a very clear one at that too. Yet the investor community has struggled to produce a commonly agreed set of norms. Reliance on a voluntary set of standards for sustainable finance helped to capture good practices and encouraged the achievement and monitoring of social and environmental outcomes, but given the industry’s maturity, this is no longer a viable option. Things need to change if responsible and impactful investments are to hit the mainstream industry in a convincing way.
Let’s take a look at the green bond market for instance. Green bonds have become a pledge for sustainability and a byword for successful impact investing. Though the green bond market today represents just a fraction of the international debt market, in 2017, it witnessed a record of $155.5bn and projections from the Climate Bonds Initiative estimate growth to hit between $250-300bn. As issuers increase objectives and typology, stricter rules are needed to safeguard their reputation. Disclosure implications are looming and threatening to undermine the integrity of projects in the use of proceeds. Investors on all sides are asking for a credible standard to be established and set a level-playing field able to spur sustainable growth.
Going forward, a more holistic approach to sustainability will prevail. This is not just good practice but a positive ‘new normal’. Just committing to green for the use of proceeds will not suffice, as the larger accountability in the investment chain will oblige actors to take into account the risks and opportunities which may arise in the rest of the business the issuer is involved in and which could clearly affect the quality and sustainability of the green elements of the green bonds.
A clear standard, that allows investors to verify the environmental quality of the underlying assets and account to their own beneficiaries, is a good point and it would streamline the industry and, as some argue, ‘reduce due diligence costs compared to a process of self-certification by individual asset managers’. Today, players use a variety of standards which have emerged from different industry players but that is far from having one single recognised approach. One of the key recommendations of the High-Level Expert Group on Sustainable Finance (HLEG) calls for the introduction of an official European standard for Green Bonds, built around an EU Sustainability Taxonomy. This would be an effective way to allow the market to reach its potential and continue to grow while meeting clear EU policy objectives.
While setting standards and regulations in general, it is important to make sure that things are not overdone. For instance, in the US, fears linked to not meeting the country’s strict legal standards on consumer protection are apparently holding investors back from seeking to raise green-labelled finance. Fear over potential litigation is making players nervous and generally doubtful about being able to comply with the Securities and Exchange Commission’s rule 144a, which is mandatory for issuers who want to access the New York capital markets.
While recognition and compliance are must-haves for any industry, it is important to keep the rules of engagement simple and clear. This is what Eurosif, the leading pan-European association for the promotion of sustainable and responsible investment (SRI) has consistently tried to do, mainly with its Transparency Code. The Code is the leading European framework for SRI funds and it presents a transparent set of guidelines that spell out some minimum requirements for SRI funds to earn this denomination. It looks at processes and steps followed by asset managers in their work to integrate ESG and choose an investment strategy. Largely recognised in Europe by sustainable and responsible investment labels and leading associations as the basis of their work, the Code has mirrored the evolution of the SRI fund industry over the years. Having today reached a new level of maturity, the Code, in its latest version, reflects this evolution by incorporating leading changes in the industry. This refers to leading relevant national laws like Article 173, the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and the HLEG. With more than 700 funds already signed up, the Code represents a simple set of understandable metrics, which are already considered synonymous with SRI.
More on Green Finance
What’s the Deal with Green Bonds?
With the UK Green Finance Taskforce recommending the issuing of a sovereign green bond and the recent launch of the...
Sustainable Finance: No Time for Fence Sitting
As the sustainability community awaits the announcement of the European Commission Action Plan on Sustainable Finance next week, political analysts...
Green Finance: The Road Ahead
The green finance market is expanding tremendously, and financial institutions seek to leverage the new opportunities from the transition to...