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.
Solving the Future of Decarbonisation in Real-Time
Source: Finance Derivative
Jamil Ahmed, Distinguished Engineer at Solace
The energy sector has faced many disruptions and challenges in recent years, from pipeline disruption to the growing demand for hydrogen. However, the most significant of all of these is the global desire to decarbonise. The growing concern over fossil fuels has created intense pressure for businesses to transition towards renewable energy sources and cut carbon emissions. Governing bodies have begun to impose regulations on organisations to force them to cut emissions by 3.4 gigatons of carbon dioxide equivalent (GtCO2e) a year by 2050, which amounts to a 90 per cent reduction in current emissions.
The constant development of markets and digital transformations will only increase the demand for energy in the future across all industries. Therefore, reducing emissions, in reality, is no small feat, however harsh or impressive the targets may be. To make decarbonisation a reality in the near term, businesses must adopt an inward-looking strategy to reduce emissions through their own operations. These are termed Scope 1 emissions and refer to emissions released as a direct result of one’s own current operations. Achieving this requires companies to streamline their operations, and improve their internal visibility to measure and track energy consumption.
The major challenge companies face in accurately measuring their energy consumption lies in overcoming the mass amounts of siloed data within their system. These data silos not only diminish productivity but also bury these useful insights, compiled into a mountain of data that is hard to identify and analyse. Ultimately, data silos are a result of organisational infrastructure built for a previous era, one with limited technological adoption, and limited pathways for dataflows. Over time these have created complex organisational barriers.
The lack of data transparency in organisational infrastructure is severely undermining businesses’ ability to gain insight from their existing data. This also impacts their ability to share data with external partners in search of meaningful solutions for decarbonisation. The value of data sharing cannot be overstated when searching for innovative solutions. A recent study shows that 45% of businesses in the energy sector see analytics and innovation as critical tools. With the entire energy sector’s ability to effectively decarbonise hinging on data sharing to drive innovation, gaining greater data insights are non-compensatory.
Another major consideration in decarbonisation is power reliability planning when transitioning to renewable energy sources. Solar and wind energy rely on changeable weather factors for operability, the varying levels of power readiness in these energy sources make them difficult to implement into the national grid. This makes reliably planning this an increasingly complex and important part of the decarbonisation journey as the sector must test for long-term stability and the potential for energy transfers and storage. A solution must be found that can address these real-time concerns.
Reliability in Real-time
Real-time data is the information that is delivered immediately after collation and enables businesses to respond to information at lightning speed. Real-time data has a host of usages in the energy sector, from alerting major weather changes that may impact power reliability to detecting overheating or electrical wastage in appliances. These information transfers are known as an ‘event’ that requires further action or response.
Real-time capabilities play a major role in overcoming data transparency issues associated with the sector, in its ability to connect interactions across systems and processes could enable energy providers to effectively identify opportunities in reducing energy wastage.
Enter event-driven architecture (EDA), the structure that underpins an organisation’s ability to view event series that occur in their system. EDA decouples the events from the system so that they can be processed and then sent in real-time as a useful information resource. This can then be analysed by resource companies to assist with optimising decarbonisation initiatives.
The strength of EDA is its scalable integration platform, as this allows companies to manage enormous quantities of data traffic coming from multiple data streams and energy sources. From this, energy companies can develop durable systems by aggregating information. This can then be sent to control systems to identify power outages or extreme weather events and conditions.
To achieve this, an architectural layer known as an event mesh is required. An event mesh enables EDA to break down data silos and facilitate the real-time integration of people, processes and systems across geographical boundaries. Implementing an event mesh also upgrades and streamlines existing systems/processes to enable better data transparency in real-time data sharing. It is unsurprising that given the great benefits of EDA both in terms of its scalability, durability and agility that a recent study found 85% of organisations surveyed view EDA as a critical component of their digital transformation efforts.
Decarbonising for the future
Regulations on the energy sector are rapidly increasing, most recently the US Senate passed the Inflation Reduction Act (IRA) on August 6th of this year. This Act signals the intense pressure on the energy sector to immediately undertake significant decarbonisation initiatives. It is designed to accelerate the production of greener and more renewable energy sources such as wind and solar. Once nations like the US have begun higher production of the technology that can harness these energy sources, others will follow suit. The only way the large-scale adoption of renewable energy sources will occur is if businesses build real-time capabilities to become event-driven businesses. Only then can the transition to decarbonisation and achieving net zero become a reality.
A zero trust environment is critical for financial services
Source: Finance Derivative
Boris Bialek, Managing Director of Industry Solutions at MongoDB
Not long ago security professionals were still focused on protecting their IT in a similar formation to mediaeval guards protecting a walled city – concentrating on making it as difficult as possible to get inside. Once past this perimeter though, access to what was within was endless. For financial services, this means access to everything from personal identifiable information (PII) including credit card numbers, names, social security information and more ‘marketable data’. Unfortunately, we have many examples of how this type of security doesn’t work, the castle gets stormed and the data isn’t protected. The most famous is still the Equifax incident, where a small breach has led to years of unhappy customers.
Thankfully the mindset has shifted spurred on by the proliferation of networks and applications across geographies, devices and cloud platforms. This has made the classic point to point security obsolete. The perimeter has changed, it is fluid, so reliance on a wall for protection also has to change.
Zero trust presents a new paradigm for cybersecurity. In this context, it is already assumed that the perimeter is breached,no users are trusted, and trust cannot be gained simply by physical or network location. Every user, device and connection must be continually verified and audited.
What might seem obvious, but begs repeating, with the amount of confidential customer and client data that financial institutions hold – not to mention the regulations – this should be an even bigger priority. The perceived value of this data also makes financial services organisations a primary target for data breaches.
But how do you create a zero trust environment?
Keeping the data secure
While ensuring that access to banking apps and online services is vital, it is actually the database that is the backend of these applications that is a key part of creating a zero trust environment. The database contains so much of an organisation’s sensitive, and regulated, information, as well as data that may not be sensitive but is critical to keeping the organisation running. This is why it is imperative that a database is ready and able to work in a zero trust environment.
As more databases are becoming cloud based services, a big part of this is ensuring that the database is secure by default, meaning it is secure out of the box. This takes some of the responsibility for security out of the hands of administrators because the highest levels of security are in place from the start, without requiring attention from users or administrators. To allow access, users and administrators must proactively make changes – nothing is automatically granted.
As more financial institutions embrace the cloud, this can get more complicated. The security responsibilities are divided between the clients’ own organisation, the cloud providers and the vendors of the cloud services being used. This is known as the shared responsibility model. This moves away from the classic model where IT owns hardening the servers and security, then needs to harden the software on top – say the version of the database software – and then needs to harden the actual application code. In this model, the hardware (CPU, network, storage) are solely in the realm of the cloud provider that provisions these systems. The service provider for a Data-as-a-Service model then delivers the database hardened to the client with a designated endpoint. Only then does the actual client team and their application developers and DevOps team come into play for the actual “solution”.
Security and resilience in the cloud are only possible when everyone is clear on their roles and responsibilities. Shared responsibility recognizes that cloud vendors ensure that their products are secure by default, while still available, but also that organisations take appropriate steps to continue to protect the data they keep in the cloud.
In banks and finance organisations, there is always lots of focus on customer authentication, making sure that accessing funds is as secure as possible. But it is also important to make sure that access to the database on the other end is secure. An IT organisation can use any number of methods to allow users to authenticate themselves to a database. Most often that includes a username and password, but given the increased need to maintain the privacy of confidential customer information by financial services organisations this should only be viewed as a base layer.
At the database layer, it is important to have transport layer security and SCRAM authentication which enables traffic from clients to the database to be authenticated and encrypted in transit.
Passwordless authentication is also something that should be considered – not just for customers, but internal teams as well. This can be done in multiple ways with the database, either auto-generated certificates that are needed to access the database or advanced options for organisations already using X.509 certificates and have a certificate management infrastructure.
Tracking is a key component
As a highly regulated industry, it is also important to monitor your zero trust environment to ensure that it remains in force and exompasses your database. The database should be able to log all actions or have functionality to apply filters to capture only specific events, users or roles.
Role-based auditing lets you log and report activities by specific roles, such as userAdmin or dbAdmin, coupled with any roles inherited by each user, rather than having to extract activity for each individual administrator. This approach makes it easier for organisations to enforce end-to-end operational control and maintain the insight necessary for compliance and reporting.
Next level encryption
With large amounts of valuable data, financial institutions also need to make sure that they are embracing encryption – in flight, at rest and even in use. Securing data with client-side field-level encryption allows you to move to managed services in the cloud with greater confidence. The database only works with encrypted fields and organisations control their own encryption keys, rather than having the database provider manage them. This additional layer of security enforces an even more fine-grained separation of duties between those who use the database and those who administer and manage it.
Also, as more data is being transmitted and stored in the cloud – some of which are highly sensitive workloads – additional technical options to control and limit access to confidential and regulated data is needed. However, this data still needs to be used. So ensuring that in-use data encryption is part of your zero trust solution is vital. This also enables organisations to confidently store sensitive data, meeting compliance requirements, while also enabling different parts of the business to gain access and insights from it.
Securing data is only going to continue to become more important for all organisations, but for those in financial services the stakes can be even higher. Leaving the perimeter mentality to the history books and moving towards zero trust – especially as cloud and as-a-service infrastructure permeates the industry – is the only way to protect such valuable data.
Green growth: The unstoppable rise of climate technology investment
Source: Finance Derivative
With the investment community focusing more and more on renewable technologies, investor interest is at an all-time high. Ian Thomas, managing director, Turquoise, reviews the current investment landscape and highlights the opportunities for investors keen to capitalise on this growing trend.
Green, or climate, finance is a label for providers of finance who are supporting investments seeking positive environmental impact. The label covers investments in green infrastructure, venture capital investment in clean technologies and renewable energy. Green finance has grown by leaps and bounds in recent years, supporting public wellbeing and social equity while reducing environmental risks and improving ecological integrity.
Worldwide, energy investment is forecast to increase by 8% in 2022 to $2.4 trillion, according to a new report by the International Energy Agency, with the expected rise coming mostly from clean energy – $1.4 trillion in total. To put this rocketing figure into some perspective, clean energy investment only rose by 2% annually in the five years following the signing of the Paris Agreement in 2015. Energy transition investment has some way to go, however – between 2022 and 2025, to get on track for global net zero, it must rise by three times the current amount to average $2,063 billion. 
Turquoise has been active for almost 20 years as a venture capital investor and adviser to companies in the climate technology space that are raising capital and/or selling their business to a strategic acquirer. Reviewing current industry investment news, as well as drawing on examples from the portfolio of Low Carbon Innovation Fund 2 (LCIF2), managed by Turquoise, I have commented below the latest on the renewable energy trends most piquing investor interest.
Renewable power is leading the charge when it comes to investment, with wind energy and solar PV emerging as the cheapest option for new power generation across many countries, and now accounting for more than 80% of total power sector investment. Solar power is responsible for half of new investment in renewable power, with spending divided roughly equally between utility scale projects and distributed solar PV systems.
This huge increase in solar spending, which continues in spite of supply chain issues affecting raw material delivery, has been driven by Asia, largely China (BloombergNEF, 2022). Meanwhile, Europe is re-doubling its efforts to achieve an energy transition away from Russian gas and other fossil fuels, building on investment that was already rising steadily prior to the outbreak of war in Ukraine. Germany, the UK, France and Spain all exceeded $10 billion on low-carbon spending in 2021.
Last year was a record year for offshore wind deployment with more than 20GW commissioned, accounting for approximately $40 billion in investment. The first half of 2022 saw $32 billion invested in offshore wind, 52% more than in the same period in 2021 (BloombergNEF, 2022). Taking into account also onshore wind, in 2021 investment was spearheaded by China, followed by the US and Brazil.
In the UK, suggested targets include plans to host 50GW of offshore wind capacity, as well as 10GW of green and blue hydrogen production, by 2030. Investors will naturally be encouraged by proposals to simplify the planning process across the board for renewable projects. France and Germany have also increased their offshore wind targets, signalling further support for investment.
Decarbonising housing: the business opportunity
The need to decarbonise residential housing, made all the more urgent by current energy prices, also offers substantial scope for investment. The gas price spike is naturally increasing interest in technology such as electric heat pumps, which had already enjoyed 15% growth in 2021 albeit from a very low base.
Recently, Turquoise announced an investment by Low Carbon Innovation Fund 2 (LCIF2) in Switchd, which operates MakeMyHouseGreen, a data-driven platform that allows homeowners to source and install domestic renewable energy generation, including solar panels and battery storage with other energy saving products in the pipeline. The investment will enable Switchd to roll out the MakeMyHouseGreen platform to a much larger number of customers. The latest episode of the Talks with Turquoise podcast series saw us interview Switchd co-founder Llewellyn Kinch about the UK energy market and national transition to decarbonisation, covering the rise of residential renewable energy and energy efficiency.
Adapting to the low-carbon economy
Meanwhile, investors should not forget opportunities on the other side of the energy market. Renewables are undoubtedly exciting investors, but there are also opportunities for fossil fuel companies to adapt their business models to the low-carbon economy. Turquoise advised GT Energy, a portfolio company from our first fund that develops deep geothermal heat projects, on its sale to IGas Energy, a leading UK onshore oil & gas producer. Under IGas ownership, GT Energy will progress its flagship 14MW project to supply zero-carbon heat to the city of Stoke-on-Trent through a council-owned district heating network.
A broad investment landscape
Forecasts show that renewables will increase to 60% of power generation in Europe by 2030, and 40% in the US and China by the same date. As demand rises for climate technology, the investment opportunities in green finance are far broader than they ever have been. Undoubtedly, as the energy crisis continues, investor interest will continue to soar to even greater heights.