On 27 November, FIA held a Compliance and Regulation forum for members in London where regulatory and industry experts offered perspectives on sustainable finance and discussed the importance of a carefully managed transition to a low-carbon economy.
Mindy Hauman, professional support counsel at law firm White & Case, made the introduction to sustainable finance, discussing the range of initiatives that are underway in the EU and the UK. A cornerstone of the EU action plan on sustainable finance is a classification system or "taxonomy" defining environmentally sustainable investments. Hauman described this concept of shared terminology as the "Rosetta Stone" of sustainability.
The taxonomy project provides a common language of what a green investment is in practice with the aim of ending "greenwashing" – a current practice where financial products are sold as sustainable, but in fact are not.
While taxonomy will be a usable tool, it will not be comprehensive, Hauman said, but she added that a shared set of terms "will certainly be useful in driving the global baseline".
Hauman's introduction was followed by a keynote address from Mark Manning, technical specialist at the UK Financial Conduct Authority, who discussed key drivers for the sustainable finance market and collaborative initiatives with the industry.
Manning's address came after the FCA published a Feedback Statement on climate change and green finance in October, outlining its approach to create an environment where market participants can manage the risks from moving to a greener economy and capture opportunities to benefit consumers. It also lays out the FCA's priority actions, including consulting early next year on proposed rules requiring certain listed issuers to follow the recommendations of the FSB's Task Force on Climate-Related Financial Disclosures.
Transition risk
A panel discussion moderated by Julia Smithers Excell, partner at White & Case, then took place where developments in sustainable finance were discussed from an industry perspective.
Siobhan Cleary, an independent consultant in strategy and sustainable finance and former head of research and public policy at the World Federation of Exchanges, talked about the links between climate change, the real economy and the financial sector.
"There are three main reasons why people are focusing on the financial sector in relation to sustainability. First, because we need more money to meet Paris Agreement commitments and the UN's sustainable development goals. There is a finance gap, which people are looking to the private sector to fill," Cleary said.
"Second, you can see in investment an attempt to move finance away from funding those things that might inhibit our ability to meet the Paris Agreement and aren't moving us in a positive direction," Cleary said. "There is also recognition that these issues, particularly climate change, but social issues as well, expose some sectors of financial services to risk."
The risk could be physical risk or transition risk, she added. With physical risk, climate change will continue to have an impact on the environment, which could pose direct risks to the quantity and quality of commodities, as well as cause supply chains disruptions.
Cleary said the industry needs to be careful about managing the transition to a low-carbon economy but added that "the slower we are to move on action, the greater the danger that the transition risk becomes severe".
New Products
The panellists agreed that with potential risks come potential opportunities, particularly in the area of product development.
From an exchange perspective, Andreas Gustafsson, senior vice president at Nasdaq, discussed how Nasdaq has launched an ESG Data Portal, which acts as a centralized distribution point, offering investors access to standardised ESG data from Nordic-listed companies while providing listed companies with a platform to showcase their ESG data. "When it comes to listed companies, we guide them and provide them with training to make sure they can use ESG standards out there," he said.
Hugo Brodie, AVP, responsible sourcing at the London Metal Exchange, described exchanges as "the perfect conduit between the financial and physical world", and talked about a number of initiatives that LME is considering, including the possible introduction of new disclosure rules on emissions to help reduce the carbon footprint of aluminium products listed on its exchange. Aluminium has been identified by the UN as one of the seven “hard to abate sectors” where reducing emissions is crucial.
Looking at how market participants can promote sustainable finance, Pauline Engelberts, global chief operations officer at ABN AMRO Clearing Bank, stressed the importance of having a consistent message throughout the industry.
"We have to work within the whole value chain to make the transition to sustainability. We really have to intrinsically want to make a change, so making sure we have one voice and the same message throughout the industry is important," Engelberts said.
"ABN Amro Bank has a strong purpose to help clients transition to sustainability and we have started those discussions with some of them, but we do need the data and the transparency, and that has to come from the industry and exchanges as well," she added.
In terms of data and regulation, the panellists agreed that there is a growing need for more comprehensive ESG data from companies that can be accessed in a format that can be easily used. "There needs to be clear regulatory guidelines on how and what companies should be disclosing," said Chris Leeds, executive director, energy sales at Standard Chartered.
