Global reporting standardization could help mitigate investor concerns about ESG greenwashing in relation to green bonds, according to S&P Global.
The financial information provider believes sustainable bond issuance, including green, social, sustainability and sustainability-linked bonds, could collectively exceed $1 tn in 2021, a near 500 percent increase on 2018 figures.
Despite this growth, a lack of transparency around instrument labeling, reporting and data disclosure leaves many stakeholders wondering whether greenwashing – where an organization presents itself as more environmentally friendly than it is – has tainted those numbers.
ESG terminology lacks consistency, which may drive investor confusion when it comes to identifying which companies or financial instruments adhere to a set of ESG standards.
There are more than 20 different sustainable bond labels, which all align with different guidelines or frameworks, according to the Journal of Environmental Investing Report 2020. The wide range of labels – and an even wider range of definitions for what constitutes a green or social project – makes navigating the sustainable bond market increasingly difficult for investors and reduces comparability across instruments.
Recently, several standards and taxonomies have emerged in an attempt to help standardize the market and mobilize capital toward sustainable objectives.
The International Capital Market Association, the Loan Syndications and Trading Association, the Loan Market Association and the Asia Pacific Loan Market Association have all launched a set of voluntary principles. These principles promote standardization and transparency for the use of proceeds, sustainability-linked bond and the loan markets.
The EU and China are also working to create a common taxonomy through the International Platform on Sustainable Finance to unify their green finance standards under a common approach and address inconsistencies among the regional taxonomies.
In addition, in April 2021 the IFRS Foundation proposed setting up an International Sustainability Standards Board to lead the mainstreaming of sustainability reporting at an international level.
EU leading in ESG regulations
At the regional level, EU efforts on standardization in ESG disclosure are being led by the European Commission (EC) action plan for financing sustainable growth, which sets out a roadmap for Europe’s transition to a low-carbon economy, according to S&P Global.
Among the most prominent regulatory initiatives, the EU taxonomy regulation, which came into force on July 12, 2020, provides a classification system for economic activities to be considered environmentally sustainable. S&P Global says the taxonomy regulation was a major step in creating a more unified language around sustainability and promoting greater availability and reliability of ESG data and disclosures to investors and other stakeholders.
On July 6, 2021, the EC also introduced a proposal for a voluntary EU green bond standard designed to create a common standard for how public and private entities use green bonds.
The EU has further proposed a new set of rules: the Corporate Sustainability Reporting Directive (CSRD). The CSRD proposes to amend the Non-Financial Reporting Directive and aims to introduce a detailed rulebook for how large companies operating in the EU disclose both their sustainability risks and their impact through the lens of double materiality.
‘We believe these policy efforts, when adopted, could eventually have spillover effects into other parts of the sustainable finance market such as social, transition and sustainability-linked instruments,’ says S&P Global.
Long road ahead for global standardization
Despite the progress being made to mandate, increase and standardize ESG reporting, however, S&P Global reports that the road to standardization globally is likely to be relatively long, with considerable fragmentation in regulations and taxonomies limiting comparability across regions.
In the Asia-Pacific region, for example, China, Singapore, Malaysia and Mongolia have each established their stand-alone green taxonomies that largely follow local regulations. In addition to regulations varying widely within the region, most of these taxonomies also differ from EU or international standards.
In the US, companies are required to disclose climate risks in securities filings if they deem such risks material and specific environmental or social impact reporting isn’t currently mandated. The US also does not have any formal definitions for what qualifies as a sustainable activity and there are currently no uniform standards for measuring corporate environmental goals or quantifying and reporting climate risks.
‘As green taxonomies continue to be developed across the globe, the challenge will be finding a way to maintain global harmonization,’ note the S&P Global report authors.
‘This will be a combined effort of industry organizations, governments, standard setters, consumers and other stakeholders. Meanwhile, as standards evolve, entities will be held increasingly accountable for their sustainability commitments.’