Green bond guidelines most widely adopted sustainable finance initiative

Yet despite developments in the area of ​​sustainability – particularly with the implementation of the EU’s taxonomy and SFDR, as well as the UK’s future SDR – the ISS has highlighted disparities between countries and a “myriad” of different sustainable investment rules around the world.

The proxy advisory firm – which focuses on corporate governance and responsible investment issues for the fund industry – said the green bond guidelines represent the only sustainable finance rules in some countries in the world. beginning of the fundraising process.

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According to ISS report co-authors Lydia Sandner, associate vice president, regulatory affairs and public policy, and Thomas Harding, regulatory oversight plays a “decisive” role in addressing sustainability issues, as well as in ESG risk management and prevention of greenwashing. , Associate Vice President, Regulatory Solutions – ESG Products.

They wrote: “While Europe is still in the lead, other regions, particularly Asia, are catching up. While the most widely used regulatory initiatives to date are the Green Bond Guidelines , come next and are often linked national and regional taxonomies.”

Although the megatrend of sustainable investing continues to grow, as regulators strive to promote greater transparency in the investment industry, initiatives “vary widely in terms of bindingness, scope and prescriptiveness. “.

Nonetheless, the ISS said regulation can “empower” economies and societies to become more sustainable and resilient, while promoting economic growth.

The report states: “Given the significant financing needs of the green transition as well as the Sustainable Development Goals (SDGs), capital markets are going to be crucial drivers of the investments needed in the years to come.”

The report also noted how different taxonomies around the world focus on defining “what are green or sustainable, mandatory or quasi-mandatory efforts” to promote transparency and mitigate climate change risks.

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There are different approaches to how countries and regions approach sustainable finance regulation and guidance, as they seek to ensure that climate risks are “properly accounted for”.

Sandner and Harding of ISS said: “Several central banks and financial market supervisors have developed climate scenarios and have begun to include climate risks in the stress tests of entities under their supervision. Another possible use of these scenarios is to inform monetary policy.

Beyond the focus on green bonds – which are expected to see an annual issuance of $4.5 billion by 2025 according to a recent study – some countries also have guidelines for social or sustainability bonds. These include Chile, Argentina, Morocco and Senegal.

To carry out their research on the rules of responsible and sustainable investment, Sandner and Harding followed global regulatory developments relating to ESG and sustainable finance.

A changing landscape

The regulatory landscape for sustainable finance is changing rapidly, making “considerable progress” in recent years.

Sandner and Harding said, “Greenwashing and consumer guidance are increasingly being addressed through regulation around sustainable financial products and advice.

“To promote improved sustainability performance of the real economy, stewardship codes have been adapted to include sustainability considerations and require investors to engage with their beneficiary companies on ESG topics.”

They added: “Green bond guidelines or similar guidelines for green loans and even green or sustainable sukuk have been created around the world and represent the most widely used category of sustainable finance regulatory tool. .

“Of course, implementation varies between and within regions. While Europe, and in particular the European Union, still leads in terms of the depth and breadth of regulatory initiatives in sustainable finance , other regions, especially Asia, are catching up.”

In Europe, France and Germany have distinguished themselves by their “strong” ambitions to become centers of sustainable finance, because they are taking the “relevant” measures to achieve this.

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When the first phase of the European Sustainable Finance Disclosure Regulation (SFDR) came into effect in March 2021, fund managers and industry players worked to ensure they complied with disclosure requirements .

The second phase of the SFDR – supposed to pave the way for a more transparent financial system in Europe – has been postponed until January 2023.

Meanwhile, in the UK, the Financial Conduct Authority is working to implement its own sustainable regulation, advised by members of the investment industry.

The UK Sustainable Investment and Finance Association, a member of the Disclosures and Labels Advisory Group which assists the FCA on its sustainability disclosure framework, recently warned that the “lack of clarity” around sustainability disclosure requirements (SDRs) could cause delays in implementation.

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Following the FCA’s release of a discussion paper seeking comment on its SDR proposals, the Investment Firms Association also called for “high standards” for any funds making environmental, social or of governance.

The fund platform’s interactive investor argued that SDR proposals risked bogging down retail investors with more “jargon”.

In the US, ISS highlighted how the regulatory landscape for sustainable finance has also changed significantly over the past year, spurred on by Joe Biden’s inauguration and continued investor demand.

Less than six months into his presidency, the 79-year-old issued an executive order calling on financial regulators to assess financial climate risk and how to integrate it into their regulators and supervisors, ISS noted.

Meanwhile, in Africa, sustainable finance is still “nascent” with a focus on green bonds and their respective guidelines.

The report’s authors added, “South Africa stands out with a developing taxonomy and ESG considerations and disclosure requirements for pension funds.”

The Asia-Pacific region would also provide an “interesting and diverse” picture of sustainable financial regulation, according to the ISS report, The depth and breadth of regulatory initiatives in the regions in 2021.

Sandner and Harding said, “With so many developed markets and economies adopting unique and individual approaches to ESG and sustainable financial regulation, this provides the perfect momentum for innovation through competition.

“The race is on to see which country will become the region’s premier destination for ESG domiciled funds and investments, and the recent trend towards regulation of sustainable finance is evident across the board.”

In the Middle East, the report notes how many countries have adhered to Islamic finance and Shariah investment guidelines for decades, but some countries are now “beginning to accelerate” their own ESG developments beyond frameworks. sharia investment.

The UAE and Israel are said to be the last to begin introducing broad ESG disclosure and risk management practices to the investment market.

“In the UAE, these tend to focus on diversifying oil-driven economies to make them more sustainable, as well as addressing the financial and physical risks of climate change,” the report said.

“In Israel, asset owners are required to publish their responsible investment strategy and define the criteria used for evaluation and monitoring.”

Investors lack confidence in COP26 results

Continued on 26and annual meeting of the United Nations Climate Change Conference (COP26) in November 2021 – where the asset management industry played a leading role – sustainability goals and net zero ambitions continue to be a key topic for governments and businesses.

Money will be a key factor in achieving climate goals, the ISS said. Yet, although the sustainable investment space continues to grow, around $20 billion in new investment will be needed to reach global net zero goals by 2050, according to the International Monetary Fund.

Sandner and Harding of ISS said: “Given the significant financing needs of the green transition as well as the Sustainable Development Goals (SDGs), capital markets are going to be crucial drivers of the investments needed in the years to come” .

ISS has been contacted for further comment.

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