Tag Archives: greenwashing

EU social taxonomy and taxonomy extension linked to environment reports

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The draft proposal for a social taxonomy will argue that in the face of a pandemic, unanswered social questions around a sustainable transition, continuing human rights abuses and continuously rising costs for housing, the time is right to identify economic activities that contribute to advancing social objectives. Just as the EU environmental taxonomy defines activities that substantially contribute to environmental objectives, a social taxonomy would do the same for social objectives.

Built on the foundation of international norms and principles like the sustainable development goals (SDG) and the UN guiding principles for businesses and human rights, a social taxonomy would help investors to contribute to finance solutions around ensuring decent work, enabling inclusive and sustainable communities and affordable healthcare and housing. A social taxonomy would be a tool to help investors identify opportunities to contribute to these objectives.

The Public Consultation Report on Taxonomy extension options linked to environmental objectives will be focussed on support for the environmental transition needed in the whole economy – it proposes further clarity on both: activities that are significantly harmful to environmental sustainability, and those that have no significant impact on it. The aim is to support transitions in areas currently of “significant harm”. They should transition to a level that at least does not cause significant harm, even if they do not actually reach substantial contribution (green). The report will set out options to build on the existing taxonomy and its use.

The Platform on Sustainable Finance will welcome stakeholder feedback on both drafts through two calls for feedback, which will run from 12 July to 27 August 2021. Platform’s advice on this will feed into Commission’s report on potential extension of taxonomy framework to be adopted by the end of 2021.

More on https://bit.ly/3AVvi1P

Commission puts forward New strategy for Sustainable Finance and proposes new European Green Bond Standard

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The Commission also adopted yesteday a Delegated Act on the information to be disclosed by financial and non-financial companies about how sustainable their activities are, based on Article 8 of the EU Taxonomy.

Thus, EU took another major step towards achieving the goals in the Green Deal by ensuring a comprehensive approach to funding the green transition.

EU proposed incorporating climate-related risks into banks’ capital requirements. The challenge for lenders is weaning themselves off their lending exposure to fossil fuels. Their initial disclosures have been limited and commercial lenders still have “patchy” data regarding their exposure to climate change.

The ECB will hold a stress test next year to see how their balance sheets may fare as the climate and economy shifts. EU states will be asked to assess by June 2023 how their financial markets contribute to reaching the bloc’s climate goals. ECB will then calibrate the right pace for the transition by setting intermediate targets for the financial sector. Insurance capital rules may also be similarly amended.

The Commission confirmed it will publish taxonomy rules later this year for agriculture, certain industries and possibly nuclear and gas power plants. EU needed to guard against the risks associated with the transition, thus considering an “intermediate taxonomy” that would allow transition bonds.

The strategy seeks to empower individuals and the bloc’s 23 million SME by defining green loans and mortgages by 2022. New accounting rules may also be needed to “recognise and report” ESG risks in financial statements.

The strategy sets out a positive vision of the reform needed in the financial system to support the European economy.

More on https://bit.ly/3jRgriU

The EU Green Bond Standard (EU GBS

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It will be logically voluntary. It will be ready to be used in 2022 and aims to set the global standard. Global ESG debt market tops 3 TUSD, with Europe taking a lead as nearly a quarter of its bond sales this year were related to social factors.

Sovereign issuers will be granted some flexibility to assess government spending programs based on their terms and conditions. The 27-member bloc itself is set to become one of the largest issuers, with 30% of its 800 BEUR pandemic recovery funding planned as green debt.

The ESMA will determine whether a bond is green or not, with external reviewers to be approved by the body. Issuers should disclose impact assessments at least once, as well as annual allocation reports for how the funds were used and they will be free to align their bonds alongside other standards.

EU GBS affords issuers an opportunity to launch taxonomy-aligned green bonds at a potentially lower cost of capital. For investors, the standard affords an opportunity to make investments in green bonds that are credible and easier to report on.

More on: https://bit.ly/3gBg7m2

“ESG rating disagreements” – new research paper

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Rating agencies disagree substantially about how they assess individual firms. Without agreement on what constitutes good ESG performance, market participants can be misled by these ratings.

The authors of this paper found ESG disagreement is most pronounced for firms with high levels of ESG disclosure, contrary to the argument that disclosure reduces disagreement. While thousands of companies now claim to integrate ESG issues in their business strategy and operations, it is not clear whether those claims are merely cheap talk.

Ratings could help investors and other stakeholders to choose companies that exhibit their preferred ESG outcomes. Having rating agencies focus on ESG outcomes could motivate companies to show real outcomes in their disclosures rather than highlighting the adoption of policies or initiatives that might not generate any real effects.

Lot of work still needs to be done to develop rules and norms that determine what characterises good ESG performance.

Authors of the research paper:

Dane Christensen, @GeorgeSerafeim, @AnywhereSikochi . More on https://bit.ly/3ooKChi

Citation:

Christensen, Dane M. and Serafeim, George and Sikochi, Anywhere, Why is Corporate Virtue in the Eye of the Beholder? The Case of ESG Ratings (February 26, 2021). The Accounting Review. DOI: 10.2308/TAR-2019-0506