Accelerating Sustainable Finance: Setting out the Green Finance roadmap for global standards
January 25 2022
Author: Shivani Ratra, ESG Partnerships, Senior Business Development Manager
Embracing sustainability: The key to corporate success
In the 21st century, sustainability is key to a company’s business success. Pressure from regulators as well as consumers has shed light on sustainability and ESG issues. According to an International Finance Corporation (IFC) poll, 90% of its clients believe Environmental Social, and Governance (ESG) support helps achieve their business goals, improves relationships with stakeholders and helps improve their brand value.1
Investors now actively incorporate ESG data into their investment decisions in order to better understand the business of companies and the projects they are investing in. Globally, there has been a significant rise in the issuance of green bonds, ESG funds and investment in sustainable projects that meet vigorous ESG criteria and standards.
The new era of ESG Finance
In a recent Gartner research2 conducted globally, 91% of banks, 24 global credit rating agencies, 71% of fixed income investors, and over 90% of insurers monitored and considered ESG factors in their investments.
Similarly, JP Morgan, the world’s largest underwriter of green bonds, has begun to add the ESG tag to its derivatives offerings. This is part of its strategy to link sustainability to all aspects of finance.
According to one study3, global sustainability investment in 2020 was USD 35.3 trillion, ten times the investment in 2004. The size of the investment indicates irrefutably that the sustainability drive is becoming mainstream and no longer a mere fad. Within ASEAN, green investment needed per year until 2030 is USD200 billion.
To future proof for long-term profitability, green finance and fintech is no longer a good to have but a must have. A McKinsey report states4 that a strong ESG proposition makes financial sense and is linked to cash flow. This is based on five factors:
(1) facilitating top line growth,
(2) reducing costs,
(3) minimizing legal and regulatory interventions,
(4) increasing employee productivity, and
(5) optimizing investment and capital expenditures.
Regulators and Investors to ascertain sustainability metrics in projects
Increasingly fund managers and asset owners are being required by regulators and their investors to ensure sustainable investment and transparency in ESG reporting of projects.
The European Union (EU) is creating a classification system that will determine which economic activities are considered environmentally sustainable (‘Green Taxonomy’). With the aim of becoming the first climate-neutral continent, the EU has a slew of legislations in the pipeline. In the EU, insurers, investment managers, fund managers, financial advisors, and insurance intermediaries will have to incorporate sustainability considerations in their businesses by Q3 of 2022.
The UK government’s HM Treasury has recently issued a policy paper “Greening Finance: A Roadmap to Sustainable Investing” with the aim of making the UK the world’s first net-zero- aligned financial centre.
Singapore leading the ESG revolution
The Singapore Stock Exchange (SGX) has recently announced a list of 27 core ESG metrics as guidance for issuers in providing an aligned set of ESG data, such as energy and water consumption, greenhouse gas emissions, gender diversity, and board composition.
In addition, from January 2022, issuers will be required to report their sustainability practices on a ‘comply or explain’ basis. From the year 2023 onwards, climate reporting will be mandatory for issuers in the financial, agriculture, and energy industries.
As the industry matures, the ESG scoring industry is now building industry-specific viewpoints. However, with the lack of standardized ESG reporting and certification, as well as validation and auditing of the ESG data, ESG data assessments are often ineffective.
With ESG Finance becoming integral for all businesses, processes and reporting will need to be standardized. The International Sustainability Standards Board (ISSB) is expected to release a series of global sustainability reporting protocols in 2022.
ESG criteria need to be measurable, auditable, and impactful. The key is quality data on sustainability that is transparent, accessible, and reliable. Digitally-stored ESG data updated in real-time on an immutable digital ledger assures quality, reliability, and transparency, and would bridge the gap in the issuance of ESG finance and mobilisation of ESG capital.
The global ESG shift is a definitive indication of an urgent need to incorporate sustainable finance regulations and ESG in investment decisions. To ensure a net-zero economy, it is critical to create opportunities for businesses to market, encourage greater disclosure in sustainability data, and set a green benchmark for the rest of the world.
1 International Finance Corporation website, Sustainability overview
2Gartner Insights June 2021, The ESG Imperative: 7 Factors for Finance Leaders to Consider, Swetha Venkataramani
3Global Sustainable Investment Review 2020, Global Sustainable Investment Alliance 2020
4McKinsey Quarterly 2019, Five Ways that ESG Creates Values November 14, 2019
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