Criteria is key
Responsible governance and concrete objectives are the cornerstones of sustainable finance. A prerequisite for concrete objectives is adopting a shared taxonomy that provides a standard definition of what it means to be ‘green.' Without a shared taxonomy, information asymmetry and the temptation for businesses to 'greenwash' may scare off investors at the precise moment when investment is most needed to finance the transition.
The European Union has therefore launched three pieces of legislation that deeply impact asset managers and investment funds.
The EU taxonomy for sustainable activities aims to classify economic activities that can be considered ‘green’ according to three cumulative criteria-contributing to at least one of the six environmental objectives proposed by the taxonomy, not causing significant harm to any of the five other objectives, and respecting minimum social safeguards.
The Sustainable Finance Disclosures Regulation (SFDR), which covers sustainability reporting within the financial services sector, helps investors make environmentally informed decisions by classifying funds into three distinct categories under Sections 6, 8 and 9 of the SFDR regulation, each with stringent and documented investment criteria. Section 9 investment strategies, for example, have a sustainable investment objective. This means they are considered to be proactive regarding ESG, whereas Section 8 strategies are seen to simply promote ESG.
The Corporate Sustainability Reporting Directive (CSRD), formerly known as the NFRD, imposes transparency obligations on large companies regarding their ESG practices.
With these three tools, the European Union now has considerable influence over the allocation of funds. However, the EU’s approach is not the only one. China is also developing its own system, whose interoperability with the European taxonomy is the subject of the Common Ground Taxonomy report produced by the International Platform on Sustainable Finances (IPSF).
Strict conditions are not limiting investment targets
The introduction of stringent criteria for selecting investments could have made it difficult for funds to identify suitable targets; however, this has not been the case. In addition to the many ESG-native startups and scaleups, many existing companies want to invest in becoming greener, and many green infrastructure projects-renewable energy, energy efficiency in buildings, etc.- also require significant investments. It is also important to note that returns from 'impact businesses' are now at high enough levels to meet the investment criteria of major private equity investors. Nevertheless, identifying targets for virtuous investment is made more difficult by limited access to companies' environmental impact data, as well as the time it takes for companies to implement a clear environmental roadmap.
Add new comment