At the end of August, a plea for globally compatible sustainability disclosure standards was published.
It was issued by a coalition of the Principles for Responsible Investment (PRI), the World Business Council for Sustainable Development (WBCSD) and the International Federation of Accountants (IFAC), supported by 65 asset managers, accountancy firms and industrial companies, so it is worth taking note of what they say.
Very sensibly, the statement said the companies making the disclosures, the accountants monitoring them and the asset managers that include them in their capital allocation decisions all need a common set of standards in a globalised world.
The problem is that, in spite of the best efforts of the International Sustainability Standards Board (ISSB), the US Securities and Exchange Commission (SEC), the European Commission and the European Financial reporting Advisory Group (EFRAG), “current draft standards and initiatives are not technically compatible in terms of concepts, terminologies, and metrics”.
While the emphasis is on standardising financial reporting standards, that is only half the story; the statement makes no mention of the multiple taxonomies either already out there or currently being drafted. It is one thing to standardise the metrics that should be disclosed, but quite another to agree whether an economic activity is sustainable.
A paper published by the Bank for International Settlements (BIS) last year – appropriately titled A taxonomy of sustainable finance taxonomies – observed: “Taxonomies are…not necessarily an instrument to implement disclosure requirements, though ideally taxonomies should be based on disclosed data.” In other words, they don’t drive what is disclosed, but they do tell us how to interpret the data.
In its discussion paper on Sustainability Disclosure Requirements (DP21/4), the FCA said it accepted the need “to build upon existing initiatives to develop a coherent and interoperable system”, but that it was “also aware that any system needs a degree of flexibility, to accommodate market developments and avoid stifling innovation”. This presumably means the UK green taxonomy will share some common ground with the EU taxonomy, but will not replicate it. Some may see that as a good thing, given the inclusion of nuclear power and natural gas in the EU taxonomy, but those probably won’t be the points of difference.
Further afield, the 10 ASEAN nations (Association of Southeast Asian Nations) have produced the first version of a high-level combined taxonomy, which consists of five principles on which the individual national taxonomies should be based.
The ASEAN Taxonomy:
1. will be the overarching guide for all ASEAN Member States, providing a common language and complementing their respective national sustainability initiatives;
2. will take into consideration widely used taxonomies and other relevant taxonomies, as appropriate, and shall be contextualised to facilitate an orderly transition towards a sustainable ASEAN;
3. shall be inclusive and beneficial to all ASEAN Member States;
4. shall provide a credible framework, including definitions, and where appropriate, be science-based; and
5. will be aligned with the sustainability initiatives taken by the capital market, banking and insurance sectors, or at least not in conflict.
These principles are all laudable, but phrases such as “shall…where appropriate, be science-based” and “at least not in conflict [with other sustainability initiatives]” are not terribly reassuring. Given the differences between the individual economies, we can expect quite a few differences when each member state publishes its own taxonomy, both across the region and beyond.
And then we have other countries, such as Canada, where production of the taxonomy was halted earlier this year, due to “fundamental differences of opinion” between committee members; and Australia, where the industry has taken the initiative ahead of the authorities, and where the Federal Minister for Financial Services has admitted that the government is five-to-10 years behind the rest of the world on ESG legislation. The government there will not look at the E in ESG in respect of funds until next year.
Given the range of investments in funds marketed in the UK or Europe, there is a danger that, without a common taxonomy, fund groups will struggle – and end investors will be confused and, no doubt, even more concerned about possible greenwashing – when some economic activities may be taxonomy-aligned in certain countries but not in others.
Climate change does not respect national borders, and many asset managers and investee companies operate internationally, yet the determination of which economic activities are aligned with environmental objectives takes place at a national (or, in the case of the EU, bloc) level.
Climate change will not be reined in by disclosures from corporates and asset managers, but it may be if we can agree what activities are acceptable. And this can only happen if politicians step back from the process and a common taxonomy is developed, or if there is at least greater consistency between different science-based taxonomies that don’t favour the economic strengths of a single country.
