SFDR and the green investing taxonomy have been broadly well received across Europe, but what if other economic powers adopt contradictory rules? “Fragmentation or global convergence” was the topic of discussion of one of the panel sessions at the Sustainable Finance Forum on 26th October hosted by Luxembourg For Finance. Some signs of action are emerging from global discussions.
There are two broad schools of thought. Some believe that high levels of global convergence on sustainable investing rules would greatly facilitate ESG investment growth and cut the cost of due diligence. Others fear that failure to take regional considerations into account could be more damaging. Yet, as well as formal rules, there can be a change in the tone of discussions within global institutions.
Common global taxonomy
This approach was highlighted at the start of the forum by Mairead McGuinness, European Commissioner for Financial Services. She pointed to the forthcoming “report on a common ground taxonomy setting out a common features in existing global taxonomies, thus providing food for thought and discussion.” She also mentioned the EU led International Platform on Sustainable Finance [IPSF], “which brings together representatives from over half of the world’s GDP, population and emissions”. As well she spoke of how the Commission is working in international forums such as the Financial Stability Board “to develop ambitious standards and principles for disclosure and to advocate for comprehensive sustainability reporting standards.”
“There’re perhaps too many initiatives for the private sector on this agenda at this point in time” said Stephen Nolan, Managing Director, the UN-convened Financial Centres for Sustainability (FC4S) network which includes 36 international financial centres. As well as the industry looking for a lead from the public sector, he added that “some of the challenges we see from our members are around a lack of skills and data, which are key building blocks to firms to develop new sustainable products.”
“We are very happy to see this become a really global issue with more and more partners actually joining these efforts,” added Petr Wagner, Acting Head of Unit for International Affairs at the Commission’s DG FISMA. He pointed that the work on sustainability began in 2018, based on three building blocks of the taxonomy (what he called the “grammar” for understanding sustainable finance activities), disclosures, and labelling.
How to go global?
Yet he was mindful of the challenge of taking these principles global. “Starting points and priorities of each jurisdiction or region sometimes are different,” he said, ruling out a one-size-fits-all approach. “Emerging economies, they have different possibilities regarding capacity building and transition targets. The European Commission is aware of that,” he said.
He favoured the approach adopted with the Corporate Sustainability Reporting Directive which aims to support a long-term strategy shift by requiring large companies to disclose sustainability targets and the progress being made towards achieving them. Ultimately, he said that he hopes this cooperation between global and regional standard setters achieves both coherence and interoperability. “I think the word interoperability is something we’ll be hearing a lot going forward,” he said.
He pointed to the creation of International Financial Reporting Standards (IFRS) as an inspiration: a joint initiative which resulted in global buy-in. This he said he views as the role for the IPSF, what Wagner referred to as “an informal platform” whose members account for roughly 55% GDP and global greenhouse gas emissions. “This is where we trying to go really in depth on issues like taxonomies,” he said. Richard Lacaille, Global Head of ESG at State Street pointed to the OECD’s work on global corporation tax as another example of this dynamic. “IFRS, is an interesting place to start, because it’s not mandatory, and yet it’s very widely adopted,” he noted.
China and US
Feeding into this process is the EU-China Taxonomy Task Force. Tracy Wong Harris, Vice President of the Hong Kong Green Finance Association said the work of this body formed last year “will form the biggest piece of the common ground taxonomy” mentioned by Commissioner McGuinness. She highlighted how regulators across Hong Kong are working together with the goal of creating a regional sustainable finance hub. “EU and China are the two leading markets that have established standards and we believe that the harmonisation between the two will form the biggest common ground for the market,” she added.
In the US, there is “very strong momentum,” said Lacaille within agencies, but the “architectural differences are pretty important” as to how the authorities can frame the debate. The implication being that US financial institutions are better able to slow regulatory moves on ESG.
“I think the EU is reasonably good and exporting standards in general,” said Wagner, not least because the first text to be drafted in any discussion can tend to dominate. Yet also, “the EU, by definition, is very internationalist and seeks a fairly pragmatic vision of what convergence can be.”