London Governance & Compliance Academy

Supporting Sustainable Finance Provisions

In simple terms, sustainable finance involves considering environmental, social and governance (ESG) factors in the financial sector’s investment choices, which results in more long-term commitments to green economic endeavours and initiatives. It has become a significant trend championed by global regulators, institutional investors and asset managers.

 

Historically, investors based their performance solely on financial metrics. However, over the past decade, considering ESG factors in investment decisions has gained traction. The Global Sustainable Investment Alliance (GSIA) reports that by 2016, 26% of all managed assets, equating to $23trn, were in ‘socially responsible investments addressing ESG issues. There have been some improvements since that time.

 

Definitions of ‘sustainable investment’ vary. GSIA highlights seven unique strategies. The leading one in 2016, at $15trn, is ‘negative screening’, excluding assets like tobacco or gun company shares. ‘ESG integration’ comes next, embedding ESG factors in investments, though methods differ across firms. ‘Impact investment’, despite its smaller size, is notably goal-oriented, targeting projects with clear impacts, such as CO2 reduction or educational gains. These approaches show that profit and non-financial goals can be aligned.

 

In today’s landscape, sustainable finance provisions are crucial for all organisations. Given legislation, public sentiment and market competitiveness, ESG integration has become essential. This article examines how two leading organisations advance ESG factors in financial sector investments, fostering a long-term dedication to green economic activities.

 

 

The World Bank

Sustainability is a multifaceted and continuously developing subject. The World Bank Group’s long-term finance division has led global efforts in advancing sustainable finance. They have achieved this through supplying data, conducting analytical research, crafting financial tools, and offering technical support. Their aim is to assist regulators and investors in client nations in making their financial systems more environmentally friendly. The  work on sustainable finance has contributed to several important initiatives – namely:

 

  1. The Global Programme on Sustainability (GPS) promotes the use of quality data on natural capital, ecosystem services, and sustainability, guiding governments, businesses, and financial bodies. The GPS has three core pillars:

Pillar 1: Information – Advancing global metrics for natural capital and ecosystem services.

Pillar 2: Capacity Building – Assisting countries in implementing natural capital accounting for policy and planning, currently partnering with 18 nations to value their resources.

Pillar 3: Incentives – Exploring environmental impacts on risk and returns in fixed-income markets.

 

  1. The Sovereign ESG Data Portal, backed by the GPS, aims to equip governments and investors with insights and tools for enhanced comprehension of sustainability criteria, notably natural capital accounting.

 

  1. Launched on December 10, 2020, the Climate Support Facility is a prominent trust fund managing the Green Recovery Initiative’s funding, aimed at fostering a low-carbon, climate-resilient recovery post-COVID 19. Its initial contributors are Germany, the UK and Austria. The facility offers technical and advisory support. It will:

 

Place expert economic advisors in pivotal government ministries for climate-focused recovery plans;

Assist countries in integrating climate into national budgets, refining their NDCs, and formulating decarbonisation long-term strategies; and

Undertake analytical tasks, including geospatial climate risk data, COVID-19’s influence on emissions, and climate policy’s effect on employment.

 

  1. IFC Edge, an initiative by the International Finance Corporation (IFC) of the World Bank Group, offers EDGE (‘Excellence in Design for Greater Efficiencies’) to allow market leaders a competitive edge by enhancing their products and enriching customer experiences. EDGE accelerates green building certification in over 170 countries by combining market insight and an investment perspective. It was established by IFC to offer a tangible solution underpinning the financial benefits of green construction and stimulating investment.

 

  1. J-CAP is a five-year initiative. In its first stages, J-Cap focused operations on Bangladesh, Indonesia, Kenya, Morocco, Peru, Vietnam, and the eight-nation West African Economic and Monetary Union (WAEMU). It has since expanded into Colombia and South Africa, with exploratory initiatives in Serbia and the Philippines. The programme will later include other nations, fostering the local capital market growth.

 

The scheme combines the World Bank’s technical aid with IFC’s practical transactions and local currency approaches. Emphasising green bond issuance, market enhancement, and eco-friendly regulatory frameworks is central to J-CAP.

 

The European Commission

On 13 June 2023, the European Commission launched measures to strengthen the EU’s sustainable finance approach. Targeting a climate-neutral economy by 2050 , it unveiled new EU opportunities. Many businesses, as seen by growing sustainable investments, are embracing this change but face challenges, especially in disclosure and reporting.

The initiative enhances the EU’s finance framework, backs businesses and boosts private investment in transition projects. By expanding the EU Taxonomy and proposing ESG rating regulations, the package improves investment transparency and simplifies the approach for businesses, advancing the European Green Deal objectives.

 

The package in more detail:

 

  1. 1. EU Taxonomy Delegated Acts

The EU Taxonomy, central to the EU’s sustainable finance, directs investments to key green activities. The Commission has now approved new criteria focusing on:

  • water and marine conservation,
  • circular economy,
  • pollution control,
  • biodiversity restoration.

 

The Commission has also revised the EU Taxonomy Climate Delegated Act, adding activities from sectors like manufacturing and transport for climate action. This broadening increases the Taxonomy’s impact on EU sustainable investments. These standards mirror the Platform on Sustainable Finance’s 2022 recommendations. The Commission has also refined the Taxonomy Disclosures Delegated Act, clarifying disclosure for these activities.

 

  1. Proposal for a regulation of ESG ratings providers

ESG ratings are crucial in EU sustainable finance, providing key insights into investment strategies and ESG-related risks. Yet, there has been a transparency gap in the current ESG ratings scenario. The Commission is now proposing a regulation to boost ESG rating transparency and dependability. Implementing strict organisational and conflict-of-interest guidelines will enhance rating providers’ integrity.

This will all enable investors to make better-informed decisions. Moreover, ESG rating agencies in the EU will require ESMA authorisation and supervision, guaranteeing high service standards.

 

 

  1. Enhancing usability

The Commission presents recent tools and measures responding to stakeholder feedback. Observations show rising EU Taxonomy use by firms, notably in capital expenditure alignment among large non-financial entities.

The Commission has set forth measures to enhance the taxonomy’s use and assist stakeholder adoption. They’re also releasing the EU Taxonomy User Guide for non-experts. Supporting firms in utilising the EU Taxonomy is pivotal to the Commission’s ongoing focus.

 

 

  1. Transition Finance

The package highlights the EU’s legal framework’s potential for transition finance. The new guidelines provide actionable guidance for businesses, showing how they can use EU sustainable finance tools to navigate towards transition and address environmental risks. The aim is to simplify transition finance for companies with authentic sustainability enhancement plans, irrespective of their current stance. Challenges specific to small and medium enterprises are also acknowledged.

 

 

Background and Next Steps

The EU Taxonomy Delegated Acts have received preliminary approval. Once available in all EU official languages, they will be presented to the European Parliament and Council for a potential six-month review, with an anticipated application from January 2024.

 

Concerning the ESG ratings providers’ regulation proposal, the Commission will commence discussions with the European Parliament and Council.

 

Following the launch on 9 June for feedback on initial sustainability reporting standards, mandatory standards will promote transparency and comparability. Feedback will be integrated before presenting the standards as delegated acts to the European Parliament and Council. Once ratified, companies under the Corporate Sustainability Reporting Directive (CSRD) will adopt these, furthering the EU’s sustainable economic transition.

 

Both the World Bank and the European Commission, among many other institutions, are making significant and substantial efforts to empower business and government to make strong investment choices based on ESG factors. Championing the move to more sustainable futures at a high level raises the bar for all organisations in seeking to ‘do business’ in the finance sector well.