At AFME’s European Sustainable Finance Conference in Amsterdam last week, speakers and delegates from across the banking industry, capital markets and policy sector came together to discuss the future of sustainable finance.
A key theme across many discussions was the importance of the work to enhance the availability of sustainability data – in terms of quantity, quality, but also consistency. This credible and comparable information should be readily available for all market participants, shareholders and other stakeholders to increase transparency, drive capital to climate solutions, and clamp down on greenwashing.
The conference came at a key time as draft sustainability reporting standards have been published for consultation by the European Financial Reporting Advisory Group (EFRAG) in the EU, the Securities and Exchange Commission (SEC) in the USA, and the International Sustainability Standards Board (ISSB) which has been tasked to develop common baseline global standards.
The question that arose on several panels was whether a globally consistent approach, with a common baseline but also the possibility for jurisdictions to level up, could really be achieved. Delegates heard from Mardi McBrien from the IFRS Foundation on the progress made in establishing the ISSB, its proposed approach and coordination with other standard-setting and jurisdictional bodies. We were also pleased to hear from Patrick de Cambourg, who chaired EFRAG’s work on sustainability reporting standards. The objective of cooperation and the benefits of globally compatible standards were clearly appreciated across the board from private and public sector speakers.
The discussion considered some differences in the philosophy, scope and articulation between the draft EU and international standards. It was emphasised that the EU standards were mandated under EU legislation and needed to take account of the existing EU regulatory framework which has embedded concepts such as “double materiality” and the scope extending beyond climate change to cover other environmental factors as well as the S (Social) and G (Governance) side of sustainability.
While the EU is clearly going faster and further than other jurisdictions, the hope remains that there can be compatibility of standards, at least with respect to the scope covered by the international baseline standards, and that these can form a basis upon which jurisdictions may build.
Beyond standards and disclosures, the conference offered the opportunity to unpack other key elements of the European and international efforts to channel investment in line with sustainability goals, assess whether the regulation is achieving its objective and identify priorities for the future.
A few other highlights included hearing from MEP Paul Tang on many important aspects of the framework, from continuing work on the EU taxonomy to the integration of climate-related risks into credit ratings and bank capital requirements, as well as sustainability standards and labels as tools to help channel finance to companies, issuers and investors.
We also heard from regulators as to how they are approaching climate and environmental (C&E) risks through their supervisory and regulatory frameworks. Steven Maijoor spoke about how these risks affect the financial system and how supervisors and banks must respond to these risks. He introduced the idea of fundamental changes to banks’ prudential framework to address concentration risks originating from C&E. How risks should be addressed in the regulatory capital framework was also discussed in a panel with the European Banking Authority (EBA) and the Bank of England.
There were insightful discussions on evolving regulatory initiatives including hearing from ESMA and IOSCO on the how to improve the availability, integrity and transparency of ESG ratings. Both agreed on the need for intervention, but it will be important to adopt an inclusive approach to avoid excluding smaller players from the market.
The European Commission and MEP Lara Wolters joined a conversation about the recently proposed Corporate Sustainability Due Diligence Directive (CSDD) which would introduce new due diligence and corporate governance requirements for companies to identify and address human rights and environmental impacts in their supply chains. The exchange of views was a window into the political negotiations that will begin in autumn, where European legislators will try to find the right balance between credible duties and pragmatic rules.
Furthermore, the conference looked beyond climate change to the important area of biodiversity and nature. The Task Force on Nature-related Disclosures (TNFD) called all market participants to begin implementing voluntary reporting and start testing their beta disclosure framework.
Aside from regulatory developments, there was a clear focus from market participants on how ESG bond markets are developing, how investors are approaching impact investing and the potential for the important role which green securitisation can play. The key to unlock its potential hangs on targeted adjustments to the securitisation regulation, and in effective EU Green Bond Standard criteria applicable to securitisation structures.
While there has been rapid progress on all these fronts, we heard clear messages emphasising the importance of continued action, of ensuring the coherence of the regulatory framework, and of international coordination. AFME continues to engage with and on behalf of its members across the sustainable finance agenda and is committed to contributing to the efforts to establish an effective regulatory framework and supporting the development of markets in sustainable finance.