LONDON, Oct 19 (Reuters) – After years of complaints that there were no rules to determine what constitutes a “sustainable” investment, investors now fret there will soon be too many to navigate easily.
More than 30 taxonomies outlining what is and isn’t a green investment are being compiled by governments across Asia, Europe and Latin America, each one reflecting national economic idiosyncrasies that can jar with a global capital market which has seen trillions pour into sustainable funds.
The European Union will introduce its green investment taxonomy or common framework in January to help asset managers inside the bloc and make green activities more visible and attractive to investors.
The rules also aim to stamp out “greenwashing”, whereby organisations overstate their environmental credentials.
Britain, which hosts the COP26 climate change conference from Oct. 31, is set to finalise its own taxonomy next year but has already signalled it will not just replicate what is drawn up across the channel.
“We think there is probably quite a strong case for diverging from the EU in a number of areas,” said Ingrid Holmes, executive director of the Green Finance Institute and chair of a panel advising the UK government on its taxonomy.
SEEKING GLOBAL ALIGNMENT
While much of Britain’s taxonomy will likely dovetail with the EU’s, it will also take inspiration from Chile, given the UK stock market hosts a large number of miners, and from China’s agriculture-focused rulebook among others, Holmes said.
That may suit asset managers investing in UK assets and offering their funds to UK investors. But for those with a global approach, different taxonomies are a headache.
“We can live with coherence, but different jurisdictions having a patchwork of different regulatory standards and approaches adds costs, but it also increases investor confusion,” Chris Cummings, CEO of Britain’s Investment Association industry body, told a parliamentary hearing last month.
The scale of money going into sustainable investments is now “phenomenal” he said, but different rules are emerging when asset managers crave global alignment in standards.
Different rules also make it hard for asset managers to reap efficiencies through automated investment analysis, market participants said.
“If I’m in Malaysia or I’m in Australia or I’m in Japan or Canada and I’ve got a local reporting requirement with a different framework and I’m trying to also trade internationally then I’ve got duplicated costs,” said Nathan Fabian of the PRI, a United Nations-backed group which promotes responsible investment.
Some major markets – including the United States – are not expected to launch a nationwide taxonomy at all.
“The United States is unlikely to follow the EU approach of developing a taxonomy embedded in regulation that defines what activities are sustainable or not,” said Eric Pan, chief executive of U.S. fund industry body the Investment Company Institute.
“We believe the (U.S. regulator) SEC should prioritise mandating appropriate corporate disclosure of climate information.”
THE TAXONOMY TO BEAT ALL TAXONOMIES
Next month the International Platform on Sustainable Finance, a body whose members include the EU, Britain, Canada and Japan, will publish a report on the common features in existing taxonomies, to try and create a shared reference for how different countries are defining green investments.
The aim is to help investors compare jurisdictions, and solidify principles that future taxonomies should follow.
A European Commission spokesperson said taxonomies should share key features such as the aim of aligning with the Paris climate accord.
“International cooperation is crucial to avoid substantial differences that could result in higher administrative costs and, in turn, hinder cross-border green capital flows,” the spokesperson said.
But with major economies set on their own proposals, and the United States not planning to introduce any at all, some asset managers are not hopeful for international coordination, even on the basic design features of taxonomies.
“I think it’s very, very unlikely we’ll ever get to a position where we can have an agreed set of guidelines and definitions,” said Joshua Kendall, head of responsible investment at Insight Investment.
Michael Marshall, head of sustainable ownership at pension scheme Railpen agreed: “I can’t see policymakers in different countries resisting the temptation to outdo their neighbours and have the taxonomy to beat all taxonomies.”
The 27-country EU’s taxonomy looks likely to be the most comprehensive and strictest when it launches next year. Europe’s system will set specific criteria on emissions and other metrics that each economic activity must meet to be classed as a green investment – although it still has controversial gaps to fill, such as on whether gas and nuclear energy will be included.
This could see funds keen to burnish their sustainable credentials look to align themselves more closely to the EU’s framework.
Given their market size and early rollout, the EU and China’s systems are being used as a starting point for the development of other national taxonomies.
For example, South Africa’s taxonomy has largely followed the EU approach, while Russia and Mongolia have drawn from the Chinese blueprint – albeit with differences in the levels of detail and coverage, according to a U.N. paper on sustainable investment regulations published last month.
Market participants still see a limit to possible global coordination, since countries are designing taxonomies to help meet national climate targets that vary from state to state.
The EU plans a 55% reduction in its net greenhouse gas emissions by 2030, from 1990 levels. China’s target is for its annual emissions to stop growing by that date.
“Taxonomies are serving a dual purpose of defining local investment needs, which may vary from country to country, for a financial market that is global, and there is just an inherent tension there that we will need to reconcile,” Holmes said.
Reporting by Huw Jones, Simon Jessop and Kate Abnett in Brussels; Editing by Emelia Sithole-Matarise
Our Standards: The Thomson Reuters Trust Principles.
Green Energy Legislation – How Your Business Can Keep Up
Britain’s commitment to its net zero targets has been called into jeopardy in recent weeks. Internal divisions within the Conservative party have seen Rishi Sunak look to weaken some of the nation’s commitments to reaching net zero emissions.
However, evidence shows that customers remain more environmentally conscious than ever. A Deloitte survey found that 35% of UK adults were more likely to trust a business with a transparent, accountable and socially and environmentally responsible supply chain.
So, what can your business do to maintain or grow its sustainability credentials whilst staying in line with green and traditional legislation?
Why operating sustainably is more important than ever
In spite of the Conservative party’s stance on the nation’s net zero targets, strong green credentials remain crucial for businesses to appeal to an increasingly eco-conscious public. 29% of UK adults are likely to prioritise a business with a strong public perception, record and reputation around climate change and sustainability over a business without.
It’s not just B2C businesses that have grounds to be concerned. UK companies operating internationally should also be watching the situation closely. The new proposal threatens to undermine UK investment from abroad and weaken our international standing with clients and business partners alike, leaving business leaders furious and investors ‘spooked’.
The EU’s Carbon Border Adjustment Mechanism came into play in October 2023, creating a further divergence between the UK and Europe’s green legislation. EU companies are now responsible for compiling reports on the carbon emissions attached to certain goods, such as steel, aluminium and fertilisers.
So, though the British government may be content with relaxing our net zero commitments, UK businesses operating in Europe cannot be. The onus has been placed upon UK businesses to increase their sustainability credentials or risk being left behind.
Interrogate your operating practices
Companies looking to operate more sustainably are often faced with the initial challenge of identifying exactly where and how the company can become greener. Modern software solutions, however, are making this simpler.
Products such as Microsoft’s Sustainability Manager have given businesses the tools to interrogate their own working practices, acting as a hub for data intelligence from across the organisation. Allowing business owners to precisely calculate the sources of their emissions, this tool enables organisations to record, report and actively reduce their environmental impact.
This level of visibility is a huge benefit to businesses operating in a range of different countries. Even before the Prime Minister’s latest comments, concerns persisted about the UK’s failure to align its sustainability rules with the EU and US.
With the implementation of the EU green tax, international alignment of your business’s green policies is more important than ever. Sustainability Manager allows total visibility over emissions in an international supply chain, allowing your company to strengthen its foothold in the green economy.
Maximise your impact with collaboration – safely
This month, the Competition and Markets Authority (CMA) released new guidance to help businesses better understand how they can collaborate to meet sustainability goals without falling foul of competition law. The Green Agreements Guidance explains how competition law applies to sustainability agreements between firms operating at the same level of the supply chain.
Such examples might include farmers aiming to improve or protect biodiversity by reducing usage of pesticides, or fashion companies agreeing to stop using certain fabrics that contribute to microplastic pollution.
The impact that multiple businesses can have on the environment outranks that of a single business in isolation, so collaboration can be a strong route to improve sustainability practices – but it’s important to do so legally. The CMA has adopted an ‘open-door policy’ regarding business collaboration in the name of sustainability, so be sure to consult them before carrying out a project like this.’
Avoid greenwashing – or pay the price
There’s no substitute for real, meaningful change. Given the importance of sustainability to the consumer, some less scrupulous businesses have been caught out by greenwashing – using unproven environmental assertions to sell products or enhance their public perception.
Earlier in 2023, the CMA were given new powers to impose direct civil penalties on companies who have been making misleading environmental claims. Your business could face fines of up to 10% of global turnover for breaches of consumer law in this manner – so any claims related to your business’s sustainability credentials must be thoroughly investigated before going public.
Support the sustainability push with external funding
In many cases, making your business more sustainable is an endeavour which requires significant operational change – and implementing such change can be a costly investment. Businesses should not be afraid of utilising external facilities like green loans or bonds to realise these changes.
Green loans and bonds are subject to an international standard known as the Green Loan Principles, which ensure the transparency of your borrowing and the environmental impact of your changes. This can protect your business against accusations of greenwashing and keep you focused on the task at hand.
Global green finance increased tenfold between 2012 and 2022, indicating just how many businesses are utilising external funding to become more sustainable. Don’t be afraid to explore your options – improving your sustainability credentials could be more achievable than expected.
Charlotte Enright, Head of Renewables at Anglo Scottish, commented: “In light of these changes to the UK’s renewable commitments, it can be difficult for UK businesses to keep informed on their responsibilities. That’s why it’s more important than ever for these companies to be proactive and drive change from within.”
Leading the charge for sustainability; How fintech are key players in creating a cleaner, greener future
Sourced: Finance Derivative
By Jeremy Baber, CEO of Lanistar
The climate crisis has officially reached “a code red for humanity.” This is according to the latest Intergovernmental Panel on Climate Change (IPCC) report, which delivered a “final warning” earlier this year. The urgency for investments and capital to be placed in sustainable hands for meaningful action has therefore only increased. To safeguard a transition towards greener practice and avert the environmental crisis as much as possible before it becomes too late, intelligent allocation of economy is imperative. The finance sector remains the principal driver for any such decisions, and so ultimately crafting a lower-carbon and more sustainable world is primarily in their hands.
Historically, the sector has always led the way for incorporating more sustainable practices, particularly when it comes to investing in energy-efficient and work-efficient technologies that we will continue using for years to come. The rise of fintech’s, alongside investments in the use of artificial intelligence (AI), the internet of things (IoT), machine learning (ML) and even the proliferation of blockchain are all ways in which finance have been ahead of the mainstream in adopting newer, cleaner technology.
Now, with environmental consciousness at an all-time high, both from a governmental and consumer standpoint, the responsibility is upon fintech’s to mediate this transition to greater sustainability. The time for sustainable net zero or even net negative global CO2 emissions is now to ensure a sustainable future before it is too late.
A cleaner consumer conscious through cleaner practices
Recent research from the open banking platform Tink has revealed that 40% of customers wish to track this impact through services provided by their bank. Consumers want a clear conscious when it comes to their personal impact, and therefore to hold their retail businesses of choice accountable, especially when many will stake green claims for consumer trust but not actually follow through.
Fintech’s can hold feet to the fire in this regard, and act in the best interests of their own consumers as an intermediary for directing businesses to change. Currently, there is a significant gap in the market for innovative tracking solutions, with Tink’s research suggesting a significant number of customers would switch purely for access to tools to track carbon footprint. Whilst 30% of surveyed banks have expressed interest in offering these tools, currently these institutions have zero plans to actually do so. It is easy to make green claims to gain customer support, but fintech’s pushing for responsibility for the sake of their customers helps motivate action.
Gen Z and millennials have been proven to be more environmentally conscious generations than ever before when it comes to their spending habits, in particular with their demands for greater transparency when it comes to tracking and reducing their overall impact on the environment. Retail Week reported over half of UK consumers are more likely to buy from a retailer or brand with a strong ethical and sustainable ethos, with Millennials more likely to be eco-conscious and by contrast the Boomer generation less so than other generations. The future market is a sustainable one, and fintech’s should be looking to capitalise upon it.
A new era for investing in sustainability
The rise of financial technology over the past decade has created a new era of potential for sustainable investing, particularly in the fields of ESG investing, green financing and carbon neutrality. Fintech’s have always enabled innovation and contributed positively towards sustainability for a lower-carbon world, particularly as they aim to disrupt traditional finance operations in a customer-focused way.
Digital payment solutions can lead the charge towards sustainability and a low-carbon economy. The carbon footprint brought by physical currency – i.e., its creation, transportation, disposal, etc. – is minimised or else eclipsed by using digital cash transactions. Utilising digital removes the need for both plastic cards and paper transactions, streamlining transaction processes in an environmentally conscious way through reducing company waste.
Change still requires a business incentive
Changes in operations absolutely require a business incentive for CEOs to choose to adopt.
In highlighting a consumer demand, businesses can feel more secure in continuing to fight for innovations in technology and lower-carbon alternatives, as both enable them to have an edge from a consumer standpoint. Nevertheless, customers are smarter and more discerning than ever when choosing financial services and are more likely to scrutinise green credentials before committing to a provider.
It is no longer as simple as just claiming to support green initiatives; real meaningful action is needed at every step and with every initiative to attract and secure interest from target consumers, lest they leave to seek a stronger alternative elsewhere. The truth is that, whilst many bigger fintech’s have greater resources to allocate to sustainable initiatives, few are actually choosing to do so.
Smaller fintech’s lead; bigger giants to follow
Financial organisations with bigger pockets have the power to push for greener tech across the board, yet the agility of smaller fintech’s to deploy sustainable initiatives has meant that they are often leading the charge for greener decisions across operations. As the fintech sector continues to mature, business initiatives can continue to refocus the ecosystem away from short-term successes and instead towards long-term green practices. Yet, if traditional companies are unable to change, they have the potential to be outmanoeuvred by their smaller underdog competitors.
Similarly, it is time for the UK government to step up their responsibility to support and protect greener technologies. The finance sector has the power and potential to put pressure for change in this regard, but policy is indeed needed without the promise of profit to secure a better future.
Consolidating ESG Considerations in Private Equity
Source: Finance Derivative
Spokesperson: Isabella Calderon Hoyos, Partner, OMMAX
ESG is a familiar term in investors’ vocabulary that has evolved in recent years. It has progressed beyond a point of compliance into a strategic imperative for value creation. To meet the demands of regulators, as well as expectations of investors, customers and employees, private equity firms must transparently demonstrate their commitment to responsible and sustainable investment practices across their portfolio.
Additionally, we are seeing increasing examples of ESG benefits in the form of financial advantages. Organisations that authentically integrate ESG best-practices, significantly outperform their peers when it comes to revenue, CAPEX and cost of capital.
Assessing & Managing Potential Risk
Environmental, social and governance issues present significant risks to investments and their growth potential, whether it might be regulatory non-compliance, operational and supply chain disruptions, legal liabilities, or reputational damage. However, it is crucial for firms to ensure their ESG claims are authentic rather than leaving themselves exposed to, or inadvertently engaging in, greenwashing.
To this end, ESG efforts should be incorporated during the entire deal lifecycle, starting with the due diligence stage, to effectively identify, assess and mitigate any ESG risks early on to avoid later damages. Such thorough due diligence practices also ensure adaptability of the portfolio company to changing regulatory landscapes and evolving stakeholder expectations, enhancing resilience to ESG-related risks and uncertainties. For example, a manufacturing company may prioritise energy efficiency (environmental), labour practices (social), and board diversity (governance) in its decision-making process.
PE firms are also facing increasing ESG pressure from stakeholders. Stakeholders, including investors, customers, employees, and the public, expect to see transparent ESG strategies and how these factors are integrated into decision-making processes. As these expectations become standard for stakeholders and regulatory bodies alike, any decision to neglect ESG considerations becomes a bigger risk as time goes on.
Regulation Across a Portfolio
Regarding ESG reporting and disclosure, private equity firms must stay informed about the evolving regulatory landscape. For example, the EU Sustainable Finance Framework introduces new regulations for integrating ESG considerations into financial sector investment decisions and compliance is essential for private equity firms, necessitating processes for accessing and managing ESG data and integrating scoring into portfolios.
Private equity firms can also bolster reporting consistency by adopting voluntary standards like the Global Reporting Initiative (GRI) and introducing the ESG Sustainability Risk Score (ESRS) which considers both the financial impact of sustainability on businesses and businesses on sustainability. By identifying material issues, private equity firms can allocate their resources to areas with the highest potential for impact.
Technology plays a crucial role in facilitating ESG integration into the deal lifecycle. By integrating technology into a firm’s target operating model, efficiency and effectiveness can be achieved. For instance, technology enables the collection, aggregation, and analysis of vast amounts of ESG data through AI and ML which, in turn, can be leveraged for transparent reporting and informing improvement strategies.
Taking the example of carbon reporting, integrating one of the many carbon management solutions available enables companies to automate and standardise the ESG reporting process. This not only improves the quality of ESG disclosures but also enhances efficiency and cost savings.
Driving Value Throughout
By actively engaging with portfolio companies, setting targets, tracking progress, and measuring the impact of ESG efforts, firms encourage conscious and competitive inclusion of ESG principles. This not only helps firms work toward their own ESG goals and branding efforts but also enhances the long-term sustainability of portfolios.
To drive value creation, private equity firms can incorporate ESG considerations from due diligence onwards and work closely with portfolio companies to improve their ESG performance. This collaboration means implementing ESG initiatives, setting measurable targets, and monitoring progress.
By actively addressing ESG factors and through enforcing consistent reporting from portfolio companies, private equity firms can enhance long-term returns, build trust with investors, stakeholders and customers, and contribute to a more sustainable future.