As policymakers look to accelerate the transition to a low-carbon global economy, the lack of reliable, comparable environmental information in businesses remains a major obstacle.
The recent proliferation of new ‘green’ products in financial services has sparked widespread concerns of greenwashing. How can an investor tell whether green bond proceeds have been used in a way that is truly sustainable? And how can issuers be fully and fairly held to account against sustainability-linked targets?
Taxonomies - common frameworks for classifying products and activities as sustainable - have been widely touted as a cornerstone of policy-led responses to greenwashing.
The EU has already set out reporting expectations for 2022 and 2023, which could have a number of direct and indirect impacts on UK financial services firms - for example where they have an EU subsidiary. The UK has also announced its intentions to legislate on its own taxonomy in the near future, with reporting requirements likely from 2024. And taxonomies are in place or under development in a range of other jurisdictions.
So how can firms stay ahead of such complex, demanding and meaningful reporting requirements? I have five suggestions.
Adopting a global response
First, scanning the horizon and - where applicable - adopting a coherent global response will be critical. While the UK and EU taxonomies will likely be closely aligned, approaches will vary across other regions. Maintaining a clear perspective on points of overlap and key differences will allow firms to deliver the most efficient response possible.
Cohesive third party engagement
Second, firms should have a clear strategy for client, counterparty and investee outreach, setting expectations up front and maintaining sight of the bigger picture. For example, contacting the same client three separate times for information on Taskforce on Climate-related Financial Disclosures (TCFD), Sustainable Finance Disclosure Requirements (SFDR) and green taxonomies will not help to build mutually beneficial working relationships. Priority should also be given to those exposures which are most likely to be impacted by data gaps - in particular where transactions involve extra-territorial counterparties outside the scope of Non-financial Reporting Directive (NFRD) or taxonomy requirements.
Acting now, not later
Third, new processes should be put in place sooner rather than later. For example - the best time for a bank to acquire loan data (ie. use of proceeds) is at inception. The quicker firms are to update onboarding and loan documentation processes, the more complete their data sets will be when regulatory requirements come into force. In turn, this will minimise the amount of pressurised, mid-cycle counterparty outreach required in the future.
Maintaining clear lines of ownership
Fourth, accountability and governance mechanisms need to be established early and clearly. Firms will not have seen anything resembling green taxonomies before. As a consequence, the new regulation may not find a natural home within existing organisational structures and ownership gaps may prevent a strong response.
Investing in technology
And lastly, given the complexity of the new requirements, firms should be looking to invest in efficient, technology-driven solutions. Data providers and regulatory rules engines will play a key role in determining which products are taxonomy-aligned and in what proportion - but it will be important for these to be integrated into wider ESG transformation programmes.
Acting decisively, innovatively, and strategically will be key.
Given the novel and far-reaching nature of the new regulations, firms which adopt a ‘wait and see’ attitude are likely to find themselves caught out and unable to catch up. The industry needs to act decisively - putting in place operating models to capture key touch points across organisations and embracing taxonomies as a critical ESG transformation opportunity. In this way, firms can succeed in producing the reliable, comparable environmental information which is so desperately needed to help drive the transition to a low-carbon future.
