If ESG tickets are now on sale at the box office, it’s the ‘E’ that’s got the main billing.
Indeed, the transition to a low-carbon economy will dominate the sustainable investing story for some time to come. If estimates that the EU requires €180 billion in additional sustainable investment every year are to be believed, where will this come from? ‘Clearly it’s not going to come from member states. No country is in a position to do that,’ says Helena Viñes Fiestas, head of sustainability research at BNP Paribas Asset Management.
This is where the investment industry steps in. But will the funding be green enough? After all, it’s one thing to add the words ‘ESG’, ‘impact’, ‘responsible’ and ‘sustainable’ to marketing materials, but it’s quite another to apply a rigorous ESG mandate and hold investments accountable through active ownership.
One key investor demand that is still absent from the current offerings is a clear set of definitions that can form a common language and a shared set of standards.
Europe leads the way
The European Commission (EC)’s action plan on sustainable finance is attempting to fill this void. It will create a taxonomy that will curb ‘greenwashing’ and define what is environmentally sustainable. It will attempt to put in place benchmarks to encourage greater transparency.
‘I think it’s a revolutionary step the EC has taken,’ says Viñes Fiestas (pictured), who is part of the action plan’s technical expert group. ‘I think the next step is to make Europe the hub for sustainable finance, taking the lead on transition and green technology.’
The action plan is drawn from the political imperative and intent across Europe to meet the Paris Agreement, says Will Oulton, global head of responsible investing at First State Investments.
‘When complete, it will be used in the development of the green bond market in Europe, making it very difficult to call anything a green bond if it doesn’t support an activity in the taxonomy. There will also be question marks about sustainability funds holding companies that may not be aligned with the taxonomy.’
Viñes Fiestas hopes the action plan’s future phases will go further in strengthening ESG investing. ‘Firstly, we believe the commission should come up with a flexible definition and minimum principals or a framework that encompasses all ESG and sustainable investment.
‘Secondly, why not create a single ESG label and put an end to all these national labels that are growing like mushrooms across Europe? The only thing they‘re doing is increasing the cost of the funds they want to encourage. It’s crazy.
‘Thirdly, the commission so far has only provided guidance to companies on how to report on climate change. We believe that the only way we can properly assess climate risk is by having meaningful and reliable data. So we‘d like these to be made compulsory.
‘We’d also like the commission to make it compulsory for companies to disclose all their activities as per the taxonomy. They need to follow the standard so we can compare apples with apples.’