Reporting and responsible investment strategies

As part of its training and advisory services, Globalfields has recently worked with a Singapore-based bank and a UK-based advisory and asset-management firm to increase their capacity in green and sustainable finance. The services we provided included sharing insights in what is needed to develop responsible investment strategies that can achieve financial returns and positive societal changes in parallel and an overview of the wide range of typologies that drive tracking and reporting in green and sustainable finance.

‍

There are three distinct, albeit partially overlapping categories of tracking and reporting:

1.     Tracking and reporting for earmarking, taxonomies, inclusion & exclusion lists

Typically, the first port of call for an organisation seeking to move further in the transition towards green and sustainable finance is to develop a taxonomy which will include a positive and a negative list of eligible/ineligible areas of investment. The positive list defines investments considered green by their nature (such as solar PV installations), while negative list serves as an exclusion list, defining areas that will not receive investments, e.g. alcohol or tobacco. Several banks have already designed their own inclusion and exclusion lists, and in many cases those are well aligned with specific policies of multilateral development banks, multilateral funds or bilateral corporation agencies. They can also serve as tools to ensure compliance with international law, such as for instance for policies against money laundering, prohibited practices, or ensuring alignment with United Nations sanctions.

Examples of green finance reporting frameworks that use such taxonomies include the Green Loan Principles (GLP), which aims to create an internationally recognised high-level framework of voluntary issuance guidelines and market standards, by providing transparency, disclosure and a consistent methodology for use across the green loan market. The GLP builds on and refer to the Green Bond Principles (GBP) of the International Capital MarketAssociation, with a view to promoting consistency across financial markets.

‍
Recently, the European Union adopted a taxonomy for green finance and sustainability, which is an important conceptual step forward in the application of such taxonomies. The EU taxonomy moves from the most basic principles of safeguards to a more substantial development of proactive actions in certain areas of investment, such as clean energy generation, energy efficiency, circular economy, preservation of biodiversity, adaptation to climate change and climate resilience.

2.     Reporting for impacts and outcomes

The second component of reporting pushes the envelope even further, in order to determine the broader impacts and outcomes of the investments, not only on the projects or on the organisation itself but also up on the wider society. This area includes reporting under Environmental, Social and Governance (ESG) frameworks, with key replicable models introduced as best practices by the Singapore Exchange (SGX) and the London Stock Exchange(LSEG). The ESG frameworks – despite all the valid criticism – if well implemented, do offer important clues as to the quality and impacts of businesses. To achieve this the underlying data needs to be material and relevant, while the analysis has to be cross-referenced with practical experience and stakeholders’ views. Furthermore, the strong connection to the Sustainable Development Goals (SDGs) can allow the users of ESG reporting to build a positive narrative that is both inward and outward-looking, engaging with all stakeholders.

3.     Reporting on risk-related variables.

This is the third dimension of reporting, which includes alignment with work such as the Taskforce on climate related financial disclosure. The TCFD recommendations are designed to build a reliable stream of consistent, material and forward-looking information on the financial impacts of climate-related risks and opportunities that an institution is exposed to, e.g. through its operations or investment portfolio. These could include those related to the global transition to a lower-carbon economy, and those arising from both risk events, that can chronic (e.g. gradual sea levels rising) or acute (catastrophic storms). For some companies, reporting under TCFD has become the natural progression from dedicated ESG risk assessments, with a split between lower and higher risk activities.

Overall, reporting through the use of taxonomies with a view to better understanding ESG and climate risk exposure and opportunities is a critical step on the way to delivering more sustainable operations at every level. This improvement in the way corporations and institutions report reflects important changes in the area of climate and environmental reporting, and a major step forward to quantify and qualify the responses to the growing threats of climate change and environmental degradation.

‍