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In search of standards — but whose?

Highway over water

Not all is rosy in the Standards World. 

Climate & Capital Media

This article originally was published by Climate & Capital Media and is reprinted with permission.

Those inflows are large and growing. "About $68 billion has gone into ESG exchange-traded funds this year, and over $118 billion over the past 12 months," reports Bloomberg. Globally, close to $2 trillion has been invested in over 4,500 sustainable funds, according to Dimensional Fund Advisors, which represents $637 billion AUM.

With those high stakes, a number of entities have proposed frameworks — almost too many — and none has yet to be widely adopted.

Asset managers pursuing ESG investments complain that they need a common set of standards. "For sustainable finance to work, we will need central planning," says the Financial Times, restating the conventional wisdom that only "systemic guidance will help public and private sector investors to distinguish good from bad."

About $68 billion has gone into ESG exchange-traded funds this year, and over $118 billion over the past 12 months.

One framework that has gained serious traction is the Task Force on Climate-related Disclosures (TCFD). It was created in 2015 to "develop recommendations for more effective climate-related disclosures that could promote more informed investment, credit and insurance underwriting decisions." With 32 members from across the G20 and with Michael Bloomberg serving as chair, it wields real influence with both preparers and users of financial data.

Last week, the Financial Stability Board (FSB), which created TCFD, issued a "roadmap" to address issues in identifying and managing climate risk. The report represents yet another effort to develop unified standards around collecting and reporting data on emissions. It noted "a need to coordinate the large and growing number of international initiatives underway that address financial risks from climate change," citing ongoing work by a bewildering number of official sector bodies — including FSB, NGFS, BCBS, CPMI, IAIS, IOSCO, OECD, IMF and World Bank — all focused on climate-related risk reporting. The FSB said it "welcomes" the addition of work by the non-profit International Finance Reporting Standards Foundation (IFRS) to "develop a baseline global sustainability reporting standard under robust governance and public oversight, built from the TCFD framework …"

We plan to bundle all 13 of the regulatory technical standards in a single delegated act.

Yet all is not rosy in Standards World. SEC Commissioner Hester Peirce has asked the IFRS Foundation not to develop its proposed International Sustainability Standards Board (ISSB) for several reasons, among them a concern that it would "inappropriately equate sustainability standards with financial reporting standards."

Add to this the announcement that the European Commission (EC) will delay the application date of detailed rules under its Sustainable Finance Disclosure Regulation (SFDR) by six months, due to "the length and technical detail" of the regulatory standards. "We plan to bundle all 13 of the regulatory technical standards in a single delegated act …" said John Berrigan, deputy-director for financial stability, financial services and capital markets union at the EC.

As the EU is ahead on sustainable finance, and as climate finance is a fast-moving global phenomenon, the lessons learned should not be lost on U.S. interests.

This week, the European Union is launching detailed plans for how it will establish carbon border adjustment mechanisms, commonly referred to as carbon border taxes, with far-reaching implications for how the world rewards or punishes climate action and inaction. For leaders, this represents an opportunity to gain preferred trading partner benefits but for laggards, it will mean exported goods will be more expensive until they step up. Other G7 nations have indicated that they will follow suit with their own CBAM regulations, so all eyes are on the details of this big climate finance move.

As the EU is ahead on sustainable finance, and as climate finance is a fast-moving global phenomenon, the lessons learned should not be lost on U.S. interests.

All of these initiatives help to highlight those businesses that are fulfilling their climate-related commitments. By whatever measure is finally adopted, it’s crucial in making progress to point out those walking the walk from the mere talkers. How this Gordian knot will be undone is anybody’s guess at this point, but the November UN COP 26 deadline looms.

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