More authentic sustainable finance is gaining momentum, as regulatory bodies are slowly coming to a consensus on the definitions, regulations, and systems that should be governing its implementation.
Definitions matter
Since the IFRS (International Financial Reporting Standards) Foundation announced the creation of its new International Sustainability Standards Board (ISSB) last year, many in the financial services sector have eagerly awaited news on its proposed global baseline of sustainability disclosure standards.
Recently, I was privileged to speak at a COP27 panel on sustainability in our sector – with an emphasis on the ISSB standards and how regulatory bodies can better facilitate climate finance.
What emerged from this discussion was that one of the fundamental challenges we face in the promotion of sustainable finance is often at a definitional level. Depending on the region, legal definitions of which investments are ‘green’ or ‘sustainable’ differ, and having to comply with multiple definitions can be costly, less transparent, and allow room for greenwashing.
Standardised and mandatory disclosures will be a crucial step toward achieving genuine progress in ESG (Environmental, Social, and Governance) and protecting against charges of greenwashing, or claims of green credentials that lack a legitimate foundation. The ISSB framework has drawn on several voluntary codes - the GHG Protocol, the Global Reporting Initiative, and the Carbon Disclosure Project - with the ultimate goal of creating a two-part standard to demonstrate to investors how ESG risks and opportunities are fundamental to their success alongside protecting people and the planet.
The board is helping to level the playing field, giving us regulatory standards that national entities can adapt for their own markets.
Regulatory successes
There are already some promising case studies showcasing how regulators and market participants are pushing innovation and adapting to international standards. For example, in the US, asset managers are setting up new funds that include ESG factors, the targeted impact of which is written into their prospectuses. Because these funds will have to disclose data on their impact and state whether they are meeting their ESG goals, this will help set new standards.
Similarly, the UK’s Financial Conduct Authority (FCA) has proposed a package of new measures to tackle greenwashing. The FCA proposes introducing sustainable investment product labels across three categories – one of which highlights investment products that improve their sustainability over time.
There are also restrictions on how certain sustainability-related terms – such as ESG, green, or sustainable – can be used in product names and marketing for products.
In the UAE, Mashreq has a Sustainable Finance Working Group (SFWG). It is making great progress in adapting the ISSB’s proposed disclosure requirements as well as the policy priorities set by the G20 Sustainable Finance Roadmap and adapting them to our market.
The SFWG’s focus areas align with what we, as a private sector bank, would like to see: better sustainability and climate disclosure, improved sustainability-focused corporate governance, and the development of a Sustainable Finance Taxonomy for the UAE.
Emerging markets the key
I believe that if baseline standards are widely adopted, we will see a significant increase in consistent, comparable, and reliable sustainability reporting. But we also know that emerging markets are going to be vital to the success of the global implementation of the ISSB standards.
There is a financial incentive, of course, as in the past, adopting international standards has allowed emerging economies to access further capital, and the ISSB initiatives are likely to have the same effect.
We notice that when there are similarities in governance standards across regions, it boosts consistency and transparency, which greatly enhances the speed in the execution of deals, thereby enabling easier access to capital and greater flow of this capital across geographies.
However, we need to engage with each jurisdiction to determine where their regulatory challenges lie and how to resolve them. Thus far, the ISSB’s proposed standards are certainly considering challenges faced by the Global South, but there will always be room for adjustment to ensure they are appropriate and proportionate for each region and its unique needs.
Collaboration between finance sector and regulators
Since January 2021, Mashreq has facilitated $13.5 billion of sustainable finance and adaptation-related investments including wastewater treatment projects worth a further $1.36 billion. Naturally, we would like to invest in more climate change mitigation and adaptation projects. However, we have two challenges: a shortage of bankable projects and a transparency problem.
So how can regulators help here? By helping us access relevant, verifiable sustainability data so we can properly conduct due diligence, manage risks, measure outcomes, and align investments with sustainable, long-term value.
This would also improve transparency on how metrics are interpreted – and this can only accelerate action and adoption of these standards in the region. We believe that governments, regulators, and multilateral development banks (MDBs) can play a significant role in promoting green finance by assisting the market in allocating resources in a more sustainable manner and by strengthening the capacity of the private sector to do so.
Incentives like guarantees, interest subsidies, and co-investment by the public sector or MDB funds could help mobilize private investment with constrained public resources allocated for green projects that provide RoE somewhat below market expectations or involve higher risks.
However, it is also up to the financial services sector to assist in monitoring, identifying greenwashing, and advising on regulations and regional considerations.
All financial institutions are gathering data on their impact and targets, so if we work hand-in-hand with regulators, we can continue to define the way forward.
