Sustainability News & Insights
April 2021
Legislation & Regulation
Sustainable Finance Trends
Investments & Products
Legislation & Regulation
SFDR: A reality at last but clarifications still to come

The issue weighing on many minds and balance sheets is Europe’s newly-minted Sustainable Finance Disclosure Regulation, long in the making and finally a reality as of March 10. Even as many of its requirements have been delayed until the beginning of 2022, financial market players are still struggling to figure out how to respond – keeping in mind that one of the law’s goals is to counter greenwashing.

The first step for many is to determine whether they fall within the SFDR’s scope and if so, what resources they need in terms of staffing, consulting, data and analysis. Complicating the situation is that clarification on some issues is likely to vary from one EU member country to another, as well as awaiting related decisions by various EU agencies.

Entities falling under the SFDR must consider, among other factors, sustainability risks in their investment and risk management processes and any significant adverse effects of investment decisions on sustainability factors during due diligence – and reflect these conclusions on their websites.

And while there are no direct penalties for failing to meet the requirements, compliance will be monitored by EU regulators’ existing oversight mechanisms – which includes non-EU AIFMs marketing funds to EU investors. Hence, for example, a non-EU asset management firm marketing a fund in the Netherlands will face supervision by the Dutch authorities.

In Luxembourg, Europe’s largest investment fund domicile, LuxFlag has responded with revisions to the label eligibility criteria for its climate finance, environment, ESG and microfinance labels – with the main changes affecting the compliance of funds claiming lesser or greater sustainability focus as defined under Articles 8 and 9. The non-profit finance labelling agency has recently awarded its coveted certification to 27 more funds, bringing the total to 347 with combined assets of €150.5bn – an increase of 77% over the past 12 months.

Meanwhile, Luxembourg will apply an appropriate regulatory framework to 20% of funds domiciled in the grand duchy to focus on green and other sustainable investments by 2025, according to the finance ministry. The government has already cut the subscription tax rate on fund assets to below 0.05% of net asset value for investments deemed sustainable under the EU’s Taxonomy Regulation taking effect in 2022.

There’s an additional headache for US fund managers such as Vanguard, BlackRock and State Street whose products in the EU are subject to the new law – but which could face a different set of rules at home in the future.

EFAMA backs EU plan for single access point for corporate disclosures

The European Fund and Asset Management Association has backed the European Commission’s consultation on the establishment of a European Single Access Point for financial and non-financial information disclosures by companies. It recommends that the platform operate on a ‘file only once’ principle and be built incrementally according to the priorities of ESG and financial reporting required.

Best source: Institutional Asset Manager
Sustainable Finance Trends
Gas in, gas out? Taxing times for the EU’s green taxonomy

Global leaders are busy rolling out big plans to boost recovery from the Covid-19 pandemic but as with vaccine distribution, the devil is in the detail - in the planning, contracts, infrastructure and personnel, besides informing often wary populations.

So it is with international efforts to transition to a more sustainable economy. The world agrees that fossil fuel use must be cut but can't agree on what to do or when and how to go about it – and how to adjust its financing.

Former Bank of England governor Mark Carney, for instance, recently criticised the European Union for the rigidity of its planned green taxonomy to classify industries as good or bad for the planet, which is intended to guide finance towards the most sustainable activities.

Carney argues that binary black and white definitions do not work in the real world, where industries, companies, individuals and governments are all at different stages of transition.

He says the EU should adopt a “50 shades of green” approach that recognises reality, reflecting, for example, that if the EU and other economies are to move away from coal and oil, some countries will have to increase use of gas until renewable energy can take up the slack.

Not everyone agrees. The European Commission is listening to both sides: it could classify gas as a partially sustainable technology, providing it replaces dirtier energy sources and can at least halve emissions per kilowatt of energy produced. The Commission has also launched a consultation on the Gas Directive and Gas Regulation, focusing on how legislation can encourage renewable and low-carbon gases and hydrogen without fragmenting interconnected markets.

Such moves may seem a sensible compromise in a complex world and will certainly please EU member states that rely on gas production to support their economies or to provide heat and light to homes and businesses. The same case could be made for nuclear power, a decision that would please France.

But potentially sensible compromises can be seen as a sell-out and lead to claims of greenwashing. Greta Thunberg was not impressed, accusing the EU of surrendering to lobbyists.

The final details of the taxonomy will be important, and not just for the EU and the financing of its own economic transition. France’s finance minister Bruno Le Maire has suggested to US special envoy for climate John Kerry that the US and the EU share a common taxonomy.

As Commission president Ursula von der Leyden and European Investment Bank president Werner Hoyer have pointed out, the EU accounts for less than 10% of global emissions. Even if the EU attains net zero greenhouse gas emissions by 2050, it will not be enough to save the planet from rising temperatures.

US president Joe Biden has unveiled his $2trn infrastructure plan, including a $628bn slice dedicated specifically to climate issues, but he too faces criticism. Unsurprisingly, the American Petroleum Institute is unhappy with the goal of decarbonising the American economy and cutting fossil fuel subsidies, saying the plan will undermine economic recovery and jeopardise jobs.

A joint approach by the EU and the US may not only be a sensible route to closing down critics, it will also likely be an essential one if real progress is to be made toward building a sustainable economy.

Global banks lent $750bn to fossil fuel industry in 2020

Global banks provided $750bn in financing to the fossil fuel industry last year, despite pledges to abide by the Paris Agreement and growing shareholder and regulatory pressure to curb lending to the sector, according to the Rainforest Action Network. BNP Paribas increased funding by 41%, the biggest rise among major banks last year, while US banks remained the industry's biggest lenders. Since the Paris Agreement was signed in 2015, the world’s 60 largest banks have provided $3.8trn of financing for fossil fuel companies, according to the coalition of NGOs.

Best source: Rainforest Action Network
See also: The Guardian
Asset managers form alliance to boost natural capital investment

HSBC Pollination Climate Asset Management, Lombard Odier and Natixis Investment Managers’ subsidiary Mirova have formed a coalition that seeks to attract $10bn for investment in natural capital by 2022. The Natural Capital Investment Alliance has been established by Britain's Prince Charles as part of his Sustainable Markets Initiative.

Best source: Investments & Pensions Europe
Investments & Products
Can biodiversity investments reverse a chilling trend?

If you’re concerned about biodiversity loss, as you should be, the news isn’t good – the rate of species extinction is moving ever faster. Up to one million of the planet’s estimated eight million plant and animal species are estimated to be threatened with extinction in coming decades, including 40% of amphibian species and 33% of marine mammals, while more than 85% of the world’s wetlands have already been lost.

Those are just some of the many alarming statistics fuelling the growing prominence of biodiversity on the investment agenda, spurring rising demand for new investment options backed by reliable data in the form of products that seek to counter the loss of habitats, plants and animals.

So it helps to have a success story to announce: conservation efforts and anti-poaching initiatives have facilitated a resurgence of the once nearly-extinct black rhino population, now numbering an encouraging 5,600. To bolster this trend, the World Bank has launched the world’s first wildlife conservation bond, which will be used to strengthen rhino conservation efforts in South Africa.

The $45m product is designed to help the population increase by 4% annually. If it works, it will serve as a template for other countries and species. The initiative is being advised by Credit Suisse and involves an International Bank for Reconstruction and Development AAA-rated bond.

It’s a start – but just that. Such products account for less than 1% of global GDP but some $1trn a year is needed to reverse biodiversity decline by 2030. And while investors have demonstrated their concern over the issue and are making it a driver of their portfolios, the lack of data and risk metrics are an obstacle.

However, there’s a possible solution on the horizon, with 15 European financial institutions joining a Partnership for Biodiversity Accounting Financials to come up with unified metrics as early as this year to measure the impact of investments in forestry, agroforestry and ecological restoration.

Globally, the International Financial Reporting Standards Foundation is working on a blueprint for measuring the impact of climate, biodiversity and other issues on enterprise value in time for the COP26 climate change conference in November.

It’s encouraging news, for sure, but these efforts are aiming to buck an unfortunate trend: So far countries have missed every target set in 2010 for reversing biodiversity loss.

Passive ESG funds have negative impact on sustainability: study

Some passive ESG funds have an overall negative effect on sustainability and impact, according to research from Impact Cubed. The study found that ESG performance varies by a factor of four between the best and worst ESG funds, with many needing to measure their impacts in order to improve.

Best source: Impact Cubed
Key Developments