Consistent, comparable and reliable data and products dependent on disclosure standards and harmonised taxonomies.
Minimum global disclosure standards and interoperable taxonomies are essential to direct investment toward green and transition projects, according to a new report by the Network for Greening the Financial System (NGFS).
The report, aimed at policymakers, regulators and investors, assesses current practices and key challenges with respect to levels of transparency provided by taxonomies, green external reviews, climate transition metrics and frameworks.
The NGFS, which represents more than 100 central banks and financial markets supervisors, said taxonomies and other frameworks designed to mobilise capital toward environmentally sustainable investments need to be “tied to clear objectives and science-based net zero targets”, but also should be highly comparable and interoperable.
While differences between such frameworks will inevitably persist, increased sustainability-related disclosures from issuers, based on minimum global standards with industry-specific metrics, can better inform investors, providing a basis for “consistent, comparable and reliable climate data, transition plans and investment products”, the report said.
The NGFS encouraged regulators and policymakers to “strengthen future efforts on disclosure and reporting”, describing baseline standards as an “essential complement” to effective taxonomies and external review mechanisms, by allowing comparison across and with jurisdictions.
“Global activity metrics will allow investors to use their own preferred science-based taxonomies to assess companies and monitor progress on decarbonisation,” said the report’s conclusion, noting an increasing range of frameworks available to investors to assess the transition of investee firms in their portfolios, a number of which were assessed in the report.
It also highlighted the benefits of greater guidance and regulation by supervisory authorities, including recommending or mandating the disclosure of forward-looking targets and transition paths of firms and the setting of minimum requirements for funds to be marketed as climate transition funds.
Progress has been made toward adoption of global baseline disclosure standards with the release for consultation of draft general sustainability and climate disclosure standards by the International Sustainable Standards Board, which has also created a working group to enable enhanced compatibility between its exposure drafts and ongoing jurisdictional initiatives on sustainability disclosures.
Earlier this week, the UK government formally launched its Transition Plan Taskforce (TPT) to develop good practice for transition plans to provide greater visibility to investors and other stakeholders on corporates’ low-carbon transition strategies. The TPT is expected to make recommendations for a Transition Plan Disclosure Framework and develop detailed sector-specific transition planning templates and guidance before the end of the year.
Regulators are also taking steps to regulate how funds are marketed, partly due to increased concerns over “greenwashing” by managers overstating their contribution to climate change mitigation. The European Commission recently finalised the remaining rules for its Sustainable Finance Disclosure Regulation (SFDR), which specifies the details managers must provide for funds branded as sustainable.
The Commission is also working with the European Securities and Markets Authority to develop minimum sustainability criteria for sustainable funds.
“The minimum requirements for sustainability reporting include both forward-looking measures necessary for transition metrics and ‘hard’ measurable sustainability performance indicators for investors in order to verify whether forward-looking targets have been achieved,” said the NGFS report.
Dr Sabine Mauderer, Vice-Chair of the NGFS and Member of the Executive Board of the Deutsche Bundesbank, said geopolitics had made it “ever more important” to reduce dependence on fossil fuels.
“To provide the necessary financing for the transition, investors need clear and internationally comparable criteria to assess the environmental benefits and costs of their investments. In a nutshell, we need harmonised taxonomies and transition frameworks as well as global baseline disclosure standards,” she said.
