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Without convergence between standards and taxonomies, market fragmentation and investor uncertainty will delay climate action.

A path is being forged to international standards for sustainable finance. The increase of standards and regulatory requirements brings challenges, including jurisdictional and sector differences, and varying principles, objectives, benchmarks and metrics in taxonomies and disclosure frameworks. As a result, many are calling for a baseline, common ground taxonomy and convergence of standards.

To address these challenges, OMFIF’s Sustainable Policy Institute has joined forces with Luxembourg for Finance to consider what is required for the standardisation of sustainable finance. Taking insight from interviews with experts across the financial sector and real economy, this report explores the latest developments in taxonomy regulation and reporting frameworks, including the TCFD, Sustainable Finance Disclosure Regulation and the Corporate Sustainability Reporting Directive.

The report examines whether there should be convergence of standards internationally, the implications of standardisation and potential benefits of divergence and the market-led approach being taken by the US. It assesses the need for a common language across standards and looks at the expected role of the newly created International Sustainability Standards Board in providing a global baseline and convergence for disclosure standards.

Key findings

  • Growing calls for a common international regulatory framework

Sustainability standards and regulations have mushroomed over the past few years. Notably, there are growing calls for a global baseline taxonomy for for sustainable activities in the form of a common international framework that allows for some degree of interoperability and local specification. To achieve this, the standardisation of ESG terminology and definitions will be key.

  • EU leads the way on mandatory disclosures

Climate-related financial disclosures are necessary to ensure capital is channelled towards sustainable projects and activities. Currently, the multitude of reporting frameworks can cause confusion, double reporting and leave participants trying to adapt to new requirements. Mandatory disclosures of ESG activities and risk could close data gaps, increase transparency and drive convergence. The EU leads the way globally, with the SFDR entering into force in 2021.

  • Role of the public sector is moving beyond regulation

The role of the public sector – including policy-makers, regulators and public investors – varies by geography. Some jurisdictions are pursuing a market-led approach, such as the US, while others favour a more direct intervention, such as the EU. Nonetheless, there is a clear shift as the public sector increasingly moves beyond regulation. The Network for Greening the Financial System, for example, is a huge step in convergence in the financial sector’s climate mitigation strategies.

  • Stakeholders divided over divestment

There has been a proliferation of ESG-labelled financial instruments. For stakeholders in the real economy, there is considerable skepticism towards ESH financial innovation, with fears of greenwashing. Stakeholders diverge in opinion on whether divestment or responsible active ownership is the most effective way of transitioning.

  • More guidance needed for the real economy

There is a disconnect between the requirements for the financial sector and for the real economy in both content and timing of ESG initiatives. Although disclosures have become mandatory for financial actors in certain jurisdictions, more guidance and capacity building are needed for non-financial corporations, particularly for SMEs.

  • Moving beyond the ‘E’ in ESG is the next challenge

Beyond climate-related disclosures, most progress has been made on other environmental concerns. Stakeholders are now seeking additional disclosures around social and governance issues relating to gender diversity, equity and inclusion, labour practices, human rights and others. However, these issues remain difficult to concretely capture via science-based metrics.