Awareness of how important environmental, social and governance aspects are to a company’s long-term growth and performance has skyrocketed in recent years. Not only do these companies need to ensure they are appropriately managing these factors today for growth tomorrow, but investors and other stakeholders need to do so as well.
While significant progress has been made on this front across the globe, it is not necessarily aligned across markets. There has been a proliferation of various disclosure-related initiatives, from the Sustainable Finance Disclosure Regulation in Europe to the Task Force on Climate-related Financial Disclosures recommendations that are being adopted in various forms and on varying levels in places such as Japan, Australia, and Hong Kong.
Truly embedding sustainable finance within the global financial system requires being able to assess the impact of those companies and investment products that are deemed sustainable. In the European Union, the choice of a regulatory approach in defining a taxonomy is seen as setting a standard, while the US is taking a market-led approach.
True convergence between approaches is unlikely. This is not only due to the various frameworks or common languages being developed in parallel but also due to market specifics and investor preferences. Rather, interoperability should be key in whatever approaches are taken.
It is necessary to ensure that financial services reduce the amount of time spent on regulatory intensive tasks in different markets simply due to various standards as these will translate into higher costs for end-investors and weigh on the competitiveness of the products we want to push. Markets and standard setters should work together to ensure that whatever approach is followed, fluidity in terms of operations is not stifled.
This opinion has been published in a recent OMFIF and Luxembourg for Finance report on "Forging the path to international standards in sustainable finance."