Political concerns over green finance costs threaten ESG reporting push


Getting common standards on sustainability reporting adopted around the world is seen as critical to harnessing the power of the investment industry to combat climate change. Yet that would not be easy at the best of times. With political resistance to green finance efforts spreading from the US into Europe, it now looks really tough.

Just consider the European Commission’s new rules for how companies should report the impact of their operations on environmental, social and governance factors. The new regime, unveiled on 31 July, marks “the dawn of a new age of environmental responsibility in business and financial planning”, according to CDP, which runs a voluntary disclosure system.

But critics say the rules have been significantly watered down in a way that makes them incompatible with existing EU rules for investors. The commission has reduced the amount of mandatory disclosure, for example, allowing companies to omit information if they consider the impact immaterial.

A group of investment firms, including Fidelity International, warned that this would mean the rules for companies, in general, would be out of step with the existing rules for financial firms. These require investors to allocate capital according to information that companies will no longer be forced to disclose. “This makes a nonsense of the whole system and is another example of the financial sector being expected to do the heavy lifting with inadequate rules for the companies that actually produce the emissions,” says one senior industry figure.

Mairead McGuinness, the European commissioner for financial services, has defended the concessions, warning that if the rules were too tough the effort would backfire due to “significant pushback” from companies.

READ Anti-ESG funds are struggling to win over investors despite political backlash

Ironically, some of the lobbying against the proposed rules came from the big Wall Street banks, whose own asset management arms will be affected by the resulting confusion.

The banks argued that reporting such a wide range of factors across their global businesses would be a huge burden. They also warned that by requiring non-EU companies that list any instrument in the EU market to comply with the rules, it risked encouraging them to list elsewhere – most obviously, in London. That would hardly advance the commission’s strategy of building up EU capital markets following Brexit, the banks pointed out.

There’s the rub, of course. Until recently, all the talk was of the UK and the EU competing to have the highest ESG standards and so taking the lead in exploiting the exciting growth opportunities of green finance. But now there is mounting political pressure to avoid putting domestic companies and markets at a competitive disadvantage.

This pressure is most extreme in the US, where conservative politicians are waging a fierce war against green finance initiatives, including a proposed equivalent of the EU’s reporting rules.

In the UK, the government has been backtracking on its green commitments, a process that has accelerated since it won last month’s Uxbridge by-election by attacking the green policies of Labour’s London mayor.

Most damagingly, the government has made a number of changes to the UK carbon-trading scheme that have resulted in the UK carbon price falling to a near-40% discount to the EU figures over four months. This will hardly help London’s ambitions to become a centre for the much larger potential market in voluntary carbon credits.

The striking shift in the government’s position does not bode well for future green finance initiatives, including the UK’s version of the EU’s sustainability “taxonomy”. Post-Brexit, the UK government adopted this definition of what counts as a green investment but promised to come up with its own version in due course. The EU went through a long bout of horse-trading over the taxonomy, which ended with the rules controversially including some nuclear and gas energy activities.

READ Asset managers face higher product launch costs amid City watchdog’s second SDR delay

Some experts, including Oxford University’s Ben Caldecott — founding director of its Sustainable Finance Group — view the whole concept as flawed but argue that the UK should take the opportunity to come up with a gold-standard version.

The expert panel set up to advise on the taxonomy has just released some sensible proposals and the government has promised a much delayed consultation in the autumn, along with a number of other elements of its green finance strategy.

But, given the government’s recent green backtracking, campaigners are understandably nervous about how committed it remains to this strategy. For example, the government has said it will adopt regulations drawn up by the International Sustainability Standards Board, which in June unveiled its first rules for disclosures in capital markets. Yet while the Financial Conduct Authority remains enthusiastic, there must be some doubt about whether ministers will see these issues as a priority, compared with its efforts to boost the competitiveness of UK capital markets.

Not long ago, campaigners talked excitedly about countries, including the UK, being engaged in a “race to the top” in terms of green reporting standards. Now the fear is that many politicians would be happier to linger nearer the bottom.

To contact the author of this story with feedback or news, email David Wighton

Share post:



More like this