To Make Finance Sustainable We Must Look Beyond COP26

There’s a lot to be discovered in Glasgow, the host city of the 2021 United Nations Climate Change Conference (COP26). But there’s certainly no magic switch to make finance “sustainable.”

Only those who have indulged in too many drams of Scotland’s finest believe COP26 can change the behaviour of investors and companies overnight. This issue is just too high complicated.

COP26, however, does provide a distinct conglomeration of political and business leaders in one place. So how do we ensure that this climate summit can inject momentum into the sustainable finance debate and that the right progress is being made at the pace required? Ultimately, how do we ensure that if companies want to make money, they do so sustainably?

Sustainable finance plays a fundamental role in making a reality of the many promises of net-zero emissions. Capital must be invested that promotes and unlocks economic and societal prosperity, and similarly, the risk and cost of climate change must be represented and considered in our investments.

For those of us advocating for a step change in the way that finance is invested, we’re faced with a jigsaw puzzle of regulation. And it’s currently a puzzle with many missing pieces. The EU’s regulatory infrastructure to make sustainable finance a daily reality for investors is not yet in place. This is worrisome, and we need to close that gap quickly. Regulation, however, is not enough; greater engagement from all interested parties is necessary as well.

There’s a lot to be discovered in Glasgow, the host city of the 2021 United Nations Climate Change Conference (COP26). But there’s certainly no magic switch to make finance “sustainable.”

Only those who have indulged in too many drams of Scotland’s finest believe COP26 can change the behaviour of investors and companies overnight. This issue is ust too high complicated.

COP26, however, does provide a distinct conglomeration of political and business leaders in one place. So how do we ensure that this climate summit can inject momentum into the sustainable finance debate and that the right progress is being made at the pace required? Ultimately, how do we ensure that if companies want to make money, they do so sustainably?

Sustainable finance plays a fundamental role in making a reality of the many promises of net-zero emissions. Capital must be invested that promotes and unlocks economic and societal prosperity, and similarly, the risk and cost of climate change must be represented and considered in our investments.

For those of us advocating for a step change in the way that finance is invested, we’re faced with a jigsaw puzzle of regulation. And it’s currently a puzzle with many missing pieces. The EU’s regulatory infrastructure to make sustainable finance a daily reality for investors is not yet in place. This is worrisome, and we need to close that gap quickly. Regulation, however, is not enough; greater engagement from all interested parties is necessary as well.

How do we move forward from COP26?

We know that sustainability and corporate governance practices are constantly evolving in the EU. Several measures have been put in place with the objective of encouraging the integration of ESG factors in the investment processes of asset managers, while also ensuring investor protection and adequate shareholder rights. Policymakers’ willingness to initiate a shift to more sustainable processes is clear.

Nevertheless, the current inconsistency regarding the scope and the language of the recent regulations on sustainable finance may confuse investors who could misinterpret the vast array of environmental, social, and governance (ESG) information at their disposal. Current EU legislation on disclosure of ESG information—Sustainable Finance Disclosure Regulation (SFDR), Non-Financial Reporting Directive (NFRD), and the Taxonomy Regulation—feature overlapping issues and inconsistencies. The absence of reliable and consistent data is a significant drag to their adoption and enforcement.

European legislators must look at this issue to ensure clarity and better investor understanding. In the same vein, the NFRD revision, should focus on the improvement of the materiality concept. In particular, double materiality should be better defined to ensure that impact materiality is correctly and consistently applied. As a first step, CFA Institute released its Global ESG Disclosure Standards for Investment Products to help investors better understand, compare, and evaluate ESG investment products; policymakers, however, still need to ensure that investors have reliable data at hand.

Photo Credit @ Getty Images / EDUARD MUZHEVSKYI / SCIENCE PHOTO LIBRARY