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Towards a sustainable finance system – Further yet to go

The transition to a global sustainable finance system is gaining pace. Speaking at the first PRI Sustainable Finance Policy Conference in September, BNP Paribas Asset Management CEO Frédéric Janbon explained that while sustainable finance is moving up the agenda for policymakers, regulators and investors, much work remains to be done. We set out the key points in this edition of The Intelligence Report.

  • Further coordination and standardisation needed to provide better clarity for investors
  • Need to establish a common understanding of what ESG integration means
  • Better quality and access of data and research
  • Not to forget the ‘S’ in ESG – we need a socially inclusive finance system

Recent years have seen a piecemeal increase in sustainability-related regulation on stewardship (e.g. the UK Stewardship Code and the EU Shareholders’ Rights directive) and transparency from companies and asset managers/owners. Now, we are starting to see more holistic approaches.

A prime example is the EC Action Plan – the most progressive and comprehensive policy package on sustainable finance. This has increasingly drawn the interest of mainstream regulators and supervisors such as the central banks-led group Network for Greening the Financial System (NGFS).

Such progress is welcome, but we must remind policymakers of the need to coordinate and standardise globally the measures that have been put in place. There are a number of priorities.

Standardised mandatory firm-level carbon reporting

Accurate and comparable information on carbon emissions from companies is an important precondition for effectively managing climate-related risks. Many companies voluntarily report emissions and other climate information. In some jurisdictions, this is compulsory, but tends to cover only direct CO2 emissions, focuses on only some sectors or does not require standardised information to be disclosed in mainstream financial filings.

This leads to incomparable, inconsistent, sparse and poor climate-related data that is impossible for investors to evaluate. The UK has introduced a unique carbon disclosure law that has significantly reduced greenhouse gas emissions by listed companies. This illustrates that mandatory standardised data requirements in financial filings can result in greater carbon emissions reductions.

We strongly support the implementation of the recommendations by the Task Force on Climate-related Financial Disclosures. In Europe, this would mean the EU making mandatory the guidelines of the Technical Expert Group on sustainable finance. The updated guidelines, which embed the recommendations of the TCFD, underpin the Non-Financial Reporting directive.

Global taxonomy: a common language

We also now need to start working towards a scientific, evidence-based global taxonomy[1]. While we understand that ‘one’ taxonomy might not fit everyone’s local needs and circumstances, the underlying principles, framework, methodology and metrics of the EU taxonomy could. A global taxonomy will help us speak the same language as to what is an environmentally sustainable activity. It will help give financial markets and investors greater confidence in green financial products.

Pinpointing exactly what ESG integration means

It is equally important to share a common global understanding on what ESG[2] integration means. This is becoming more pressing as investment regulation encourages ESG integration. We advocate a principles-based, proportionate approach to ensure minimum standards to help dissipate fears of 'ESG washing', while allowing sufficient flexibility for the investment strategy and underlying assets of each investment product to be taken into consideration.

We need a shared definition on SRI[3], impact investing, etc. The PRI, EUROSIF and other organisations have gone far in developing a framework for members. We now need to reconcile the many existing definitions and practices with those emanating from legal and regulatory sources to provide clarity.

The importance of establishing a common understanding and minimum standards cannot be underestimated. It will strengthen confidence in the market, especially the retail market. In Europe, this is even more urgent as ESG considerations are to be included in investment advice. This could be a real game changer in reaching retail investors. It would help them determine whether a financial instrument meets their objectives and preferences.

Better quality and transparency of ESG data and research

ESG data providers and many research agencies have done well in helping to lead the efforts to develop methodologies and indicators to assess companies’ ESG performance. However, the lack of minimum standards for some fundamental performance indicators and the absence of market standards on how to assess companies’ performance make transparency extremely important.

As investors, we need to understand how ESG research providers and credit rating agencies take ESG factors into consideration. It is equally important to avoid conflicts of interest and excess market influence in an increasingly concentrated market that is gaining power as integrating ESG becomes the norm. Healthy competition and transparency are vital for an innovative, functioning finance market.

Don’t forget the ‘S’

Of course, ESG is not only about the environment and governance. We should not forget the social ‘S’. In the current political climate, we need to create an economic and financial model that is more socially inclusive. A rising share of the population has been left behind, with worsening inequality risking fracturing societies, undermining economic and business growth, and slowing the transition.

This March, we published the Global Sustainability Strategy. It outlines our vision for a sustainable future and our implementation plan for the next three years including the integration of ESG considerations across our portfolios globally. We regard three issues as critical for a more sustainable economic system:

  • the energy transition
  • environmental sustainability
  • equality and inclusive growth.

We are aligning our investment research, portfolios, reporting, and company and regulatory engagements in support of each of these ‘3Es’. Greater equality and inclusive growth are, for us, a fundamental precondition of a sustainable future. This is why BNP Paribas joined the OECD’s G7 Business for Inclusive Growth coalition.

As PRI signatories, we have committed to being “active owners and incorporate ESG issues into our ownership policies and practices” (Principle 2). Accordingly, we have published our strategy on engagement with policymakers on sustainability-related issues. For example, we are pursuing mandatory reporting on issues such as

  • the CEO-employee pay ratio
  • the gender pay gap
  • greater transparency on lobbying practices and labour standards in supply chains

[1] Also read What does ‘green’ mean? The EU’s taxonomy spells it out

[2] Environmental, social and governance criteria

[3] Socially responsible investing

This article appeared in The Intelligence Report – 29 October 2019

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