EUROPE: AT THE FOREFRONT OF TRANSPARENCY

In an attempt to neutralise greenwashing, it’s widely accepted that it is necessary to strengthen non-financial information provided to the investor. Further, in order for investors to be able to choose products that best meet their expectations, standardising this data is a crucial step.

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The new issuer reporting rules will provide investors with a new set of detailed information on the sustainability-related features of financial products.

Ewa Jackson, Director of Sustainable Investing at BlackRock

The gradual implementation of a common reference framework on sustainable investments in the EU, thanks to the taxonomy, is the first pillar in fostering a greater transparency. Transparency is also the subject of the other two pillars on which the EU is working. In March 2021 the Sustainable Finance Disclosure Regulation (SFDR) came into force. It requires financial market players classify their products according to their degree of sustainability, from grey (Article 6) to dark green (Article 9) in order to simplify investors’ choice. This classification should be refined in the medium term (2022 or 2023) through the publication of the Regulatory Technical Standards.

However, in order for these reports to be as reliable as possible, financial services firms must obtain clear and coherent information from company managers on the ESG risks that concern them and on the impact of their activity on both people and the environment. This is the purpose of the Corporate Sustainability Reporting Directive (CSRD). From 2024, should the dossier progress well, large companies, listed companies, banks and insurers will be obliged to publish non-financial information annually.

The new issuer reporting rules will provide investors with a new set of detailed information on the sustainability-related features of financial products,” notes Ewa Jackson, Director of Sustainable Investing at BlackRock. “This will allow investors to make more informed decisions based on a more comprehensive set of information.” Jackson also believes that data quality has already improved in recent years. “Challenges resulting from lack of data and lack of robust data has been a major obstacle to product innovation and the creation of sustainable products in the past. However  improvements in both the availability and quality of sustainable data to investors has resulted in an acceleration of the integration of such data into our investment processes and the creation of dedicated sustainable products.

Beyond the requirement for information, standardisation is key. In the race to impose a single benchmark for non-financial reporting, the head start that the European Union currently enjoys could enable its transposition to a fairly large number of jurisdictions. Kalin Anev Janse, Chief Financial Officer at the European Stability Mechanism, insists that the EU taxonomy is the first global regulation to come to market. “The taxonomy developed by the EU will eventually become the gold standard to which all companies in the world will wish to comply,” he noted during the Sustainable Finance Forum organized by Luxembourg for Finance last october. “In the future, I will expect my banker or broker to be able to display European standards, in the same way that I trust a European organic label in the supermarket.”

 

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We have developed a standardised sustainable finance framework that is closely linked to the European taxonomy – no matter what country or region we operate in, we ensure our investments are in line with this framework.

Kalpana Seethepali, Director of ESG for Asia Pacific at Deutsche Bank

Kalpana Seethepali, Director of ESG for Asia Pacific at Deutsche Bank, explains that the banking institution is aligning itself with the European model. “We have developed a standardised sustainable finance framework that is closely linked to the European taxonomy – no matter what country or region we operate in, we ensure our investments are in line with this framework.” Stressing the need to stamp out greenwashing, Seethepali emphasises that regulation “should not only push, but also guide companies to disclose the right metrics to markets and key stakeholders to provide them with a clearer picture of their transition towards a sustainable business model.”

Beyond the model that is currently being developed to foster transparency, Seethepali highlights an important issue relating to the development of sustainable investments that has by-and-large gone unnoticed. “Concerning ESG accounting, there is a significant risk that ‘sustainability’ is counted more than once.” Meaning, on an aggregate level, the impact on the ground is less than invested amounts suggest.

She explains that “different institutions may note they are channelling significant amounts into sustainable investments, but sometimes they are just refinancing an existing asset, and the impacts won’t add up to the amounts invested.” Another matter that stems from this is that the same underlying asset may have better ESG outcomes because a financial institution associates higher or more credible ESG metrics and KPIs with the transaction. “What the industry needs is robust ESG accounting, which follows through the life of the investment. At the end of the day, you must be able to measure the impact on the ground against the money investment,” notes Seethepali.

As with any new mechanism, there are certain aspects that need tightening and modifying, however with transparency at the heart of the European financial system, Jansen is optimistic about the future credibility for investors. “The ultimate goal is for the investor to be confident in what he or she is purchasing and I’m confident we will achieve this, the consumer demands it.