Shades of green: financial standards

1st May 2018

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Deciding whether a project is environmentally friendly can be tricky, but an initiative on green financial standards could facilitate the process, writes Elisabeth Jeffries

Is hydropower environmentally friendly or not? That question, dividing investors integrating environmental, social and governance (ESG) factors, is about to be answered – with far-reaching effects on sustainable finance.

The inconsistency in ESG investing could change now that the Green Finance Taskforce has published its findings in its report, ‘Accelerating Green Finance’, which came out in March. Among many issues, the taskforce – formed by the UK’s Department for Business, Energy and Industrial Strategy (BEIS) in 2017 – considered a set of innovative green financial standards, which could include green investment labels and a green financial classification (taxonomy). These could specify the status of hydropower, for example. A key question is whether the taskforce’s recommendations will activate tighter investor reporting laws.

Mix of views

Some believe the taskforce’s report will lead to improved legislation. “The momentum [towards stricter reporting rules] is unstoppable,” says Nick Molho, executive director of environmental consortium the Aldersgate Group. At first sight, it is not obvious why.

For one thing, the taskforce’s declared aim is not regulatory. “The goal of the standards will be to promote better integration of green finance issues into global investment and finance practices,” says a BEIS spokeswoman.

Secondly, several financial disclosure laws already demand information on carbon, environmental and other factors considered non-financial. They include the Companies Act 2006 and the EU Non-Financial Reporting Directive – the latter incorporated into UK law. The scope of both includes some investment companies. “Quite a lot will be achieved with existing requirements in place,” says David Harris, group head of sustainable business at the London Stock Exchange Group. Clearly, many listed companies would oppose regulation on further ESG disclosure, as they do in many areas.

“The goal will be to promote better integration of green finance issues into global investment and finance practices”

Moreover, investors are already targeted by voluntary disclosure schemes, such as the Financial Reporting Council 2010 UK Stewardship Code, directed at institutional investors. The code expects them to monitor and engage with companies on strategy, performance, capital structure and corporate governance and risk – and the environment, some would suggest.

Thirdly, there is already a drive to improve voluntary disclosure using standards developed by non-profit organisations and industrial and financial companies. The Task Force on Climate-related Financial Disclosures (TCFD) is one example. Its guidelines on better climate scenario analysis by businesses, for instance, give companies the chance to experiment and consult. One of the ‘Accelerating Green Finance’ recommendations is that the TCFD guidelines should be implemented.

However, these activities take place against a backdrop of international finance. The green financial taxonomy and green investor disclosure standards introduce a hierarchy for assessing investors. ‘Green’ would probably signify ‘higher-quality’, drawing capital towards greener products. But across borders, comparability and consistency are needed, so there is a movement to regulate. If investors continue to improve voluntary disclosure quality, this process could be delayed. But, according to Molho, clearer environmental disclosure rules for investors are inevitable.

Such a move is under consideration. ‘Accelerating Green Finance’ suggests the UK should align with EU reforms already outlined in the EC sustainable finance action plan. Published in March, this aims to table a proposal to clarify investor duties on sustainability by the second quarter of 2018. Whether these can be standardised beyond the EU remains to be seen.

Elisabeth Jeffries is a journalist specialising in business and the environment

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