A growing interest of the financial industry for sustainable investments
Sustainable investing has continually garnered more attention over time and has particularly increased since 2019 with the health crisis and financial regulatory changes.
Annual cash flow into sustainable funds more than doubled from 2019 to 2020 and has increased tenfold since 2018.
A 2020 Trends Report by the United States Forum for Sustainable and Responsible Investment noted total sustainable investment assets under management reached $17.1 trillion — a 42% increase since 2018. Today, it’s estimated that 33% of all U.S assets under professional management are tied to sustainable investing or related to ESG practices.
But what do we mean exactly by the term sustainability?
Sustainability for the UN
Sustainability requires the integration of environmental and social issues with economic growth.
Etymologically the word sustainable translates to sustainable + ity. So sustainability can be described as combining sustain + capability. Sustainability is the term that means that something will sustain its existence, meaning something that is “bearable”, which will continue on a certain level”.
Sustainability embodies the idea that we shouldn’t be destroying the Earth for monetary gain, by using smartly available natural resources.
The UN commission defined in more details its vision of Sustainability in 1987 as “meeting the demands of the present while still preserving the capacity of future generations in meeting the need”.
Consequently, the UN has categorized the sustainable development objectives in terms of sustainability in 17 categories, the so called SDG (The Sustainable Growth Goals): (1) No Poverty, (2) Zero Hunger, (3) Good Health and Well-being, (4) Quality Education, (5) Gender Equality, (6) Clean Water and Sanitation, (7) Affordable and Clean Energy, (8) Decent Work and Economic Growth, (9) Industry, Innovation and Infrastructure, (10) Reduced Inequality, (11) Sustainable Cities and Communities, (12) Responsible Consumption and Production, (13) Climate Action, (14) Life Below Water, (15) Life On Land, (16) Peace, Justice, and Strong Institutions, (17) Partnerships for the Goals.
The objective of the UN is to give a framework to companies and financial institutions to commit to more environmental sustainability.
Unfortunately, the UN SDGs have not been massively adopted. On the contrary, local green taxonomies have started to appear to help financial institutions classify their investment products with a common framework at the regional level.
We give below some exampes of these emerging green taxonomies in different regions.
Sustainability in other countries
The Mongolian taxonomy
Mongolia was one of the first countries to establish a green taxonomy in 2019.
The Taxonomy focuses on four environmental objectives (climate change mitigation and adaptation, pollution prevention, resource conservation and livehood improvement) and on 6 principles:
- Contribute to national policies and targets
- Address environmental challenges
- Cover high-emitting, key economic sectors
- Align with international standards and good practices
- Comply with ESG standards
- Continues review and development
The Chinese Taxonomy
China issued several legislative frameworks in relation to sustainable finance. The green bond catalogue issued by the People’s Bank of China in 2015 is often referred to as China’s taxonomy. China also issued a “Guiding catalogue for the green industry”, updated in 2019. For lending, the China Banking Regulatory Commission issued green credit guidelines, performance indicators and reporting forms.
For instance, based on the summary, the catalogue indicates a list of “high priority” hydropower projects but does not use quantitative, technology-agnostic thresholds like the EU taxonomy does. The six categories of green industries listed in the catalogue are:
- Manufacture of energy efficient equipment
- Clean production industry
- Clean energy industry
- Industry of ecology and environment
- Green upgrade of infrastructure
- Green services
The EU taxonomy
In the European Union, the European Commission adopted last year a Green taxonomy to help financial institutions classify their financial products based on their environmental sustainability.
The Taxonomy Regulation was published in the Official Journal of the European Union on 22 June 2020 and entered into force on 12 July 2020.
The Taxonomy Regulation establishes six environmental objectives which are not fully aligned with the UN SDGs:
- Climate change mitigation
- Climate change adaptation
- The sustainable use and protection of water and marine resources
- The transition to a circular economy
- Pollution prevention and control
- The protection and restoration of biodiversity and ecosystems
The UK taxonomy
With the Brexit, the UK decided not to follow the European regulation on sustainability.
On 18 October 2021, the UK government released a report titled “Greening Finance: Roadmap to Sustainable Investing” , which reveals the plan of the UK government to launch very soon a green taxonomy different from the EU taxonomy.
Indonesia, Canada, US…
Other countries have already announced the publication of their own taxonomy in the coming years, like Indonesia, Singapore, Australia, Canada or the US.
The next challenge: building a common appraoch of sustainability
The fast growing publications of local green taxonomy is obviously a very positive signal. However, their diversity may increase the risk of greenwashing and generate a tremendous complexity in terms of product classification and recommendation, especially for international financial institutions.