- Jacob Michaelsen
- Head of Nordea Sustainable Finance Advisory
With most of the wishes for a Happy New year now firmly behind us, we start to look ahead to another year of hectic and momentous change in the world of sustainable finance. To guide you through this, we have distilled the five key themes that we in the Sustainable Finance Advisory team believe will shape the developments and discussions for 2022.
1) General market: more action, less signalling
We start out with a high-level, perhaps simple, yet important reflection: 2021 was an eventful year in the world of sustainable finance! Events such as COP26 and the launch of the International Sustainability Standards Board highlight the top-level leadership. Also, a slew of regulations came into effect or were announced, such as the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosure Regulation (SFDR). What’s more, the EU Taxonomy was officially (and finally) signed into law.
Whilst all of this is certainly supportive of the broader development of sustainable finance, it is also important to be mindful about the fact that such commitments and signalling need to be married with tangible actions. Real progress rarely happens at the flick of the switch, but through slow-burning, incremental and iterative actions building on previous experience. We hope for 2022 to be the year where such action takes precedence over grandstanding.
We hope for 2022 to be the year where action takes precedence over grandstanding.
2) ‘Net-Zero’ targets are becoming the norm
Of the list of new buzzwords to enter the sustainable finance lingo in the past year, the concept of “net zero” is probably at the top of the list. As investors have become increasingly aware of their portfolio’s climate footprint, companies have followed suit to stay on the good side of investor sentiment by committing to “net-zero” carbon targets, typically with a deadline around 2030-2050.
Indeed, when looking at the Science-Based Targets initiative (SBTi), a not-for-profit partnership between CDP, the United Nations Global Compact, World Resources Institute and the World Wide Fund for Nature, it is evident that 2021 was the breakout year. Since its formation in 2015, less than 1,000 companies globally had committed to such targets by the end of 2020. As 2021 came to a close, that number had increased to well-over 2,000. In fact, 2021 proved to be such a momentous year that the organisation had to close for applications already by November.
As we look into 2022 and beyond, it is evident that this trend will continue. One important driver is the fact that science-based targets fit like a glove with the burgeoning market for sustainability-linked financing (both bonds and loans). That is, companies with CO2 reduction targets approved by the SBTi will find the process for defining key performance indicators (KPIs) and targets relatively easy. However, with such explosive growth numbers, it is always prudent to be mindful about risks.
3) Greenwashing has taken centre stage
The origin of the term “greenwashing” dates back to 1980s when the hotel industry was accused of falsely promoting environmental concerns for reusing towels when it was really intended as a cost-saving exercise. In the financial markets, the term has often been raised in the context of sustainable finance and investments, but mostly in water-cooler chat, in the news or by environmentally focused NGOs, and not in the inner workings of the investment industry nor financial supervisory authorities – that is, until 2021. With a number of high-profile cases in recent months, the market now pays attention when the issue of greenwashing is raised.
This dynamic is likely to persist, and even strengthen, during 2022 as regulator scrutiny and investor ESG skills pick up. Several areas seem ripe for potential misguidance or exaggeration, such as with the explosion of “net-zero” commitments by the corporate sector (see above), or asset managers’ sustainable investment claims. That said, it is important to ensure that scrutiny and accountability (both important for market integrity) do not stifle innovation and bold ambition. Pushed too far, such endeavours could risk doing more harm than what they are intended to safeguard against. In other words, the risk of inaction is real. We don’t want to throw the baby out with the bathwater.
The market now pays attention when the issue of greenwashing is raised.
4) Sustainability reporting to harmonize
A development that seems to have been years in the making (largely because it has) is the global harmonisation around sustainability (or non-financial) reporting standards. Essentially all of the previously established initiatives (such as TCFD, SASB and GRI) have been voluntary and looked to address different aspects. This broad array of standards left the market with uncertainty and a lack of clear, overarching guidance. Enter the International Sustainability Standards Board (ISSB), the newly formed standard-setting board focused on sustainability reporting and hosted by the esteemed International Financial Reporting Standards (IFRS) Foundation. The launch of the ISSB late last year followed the proposal for an EU Corporate Sustainability Reporting Directive and the implementation of the Sustainable Finance Disclosure Regulation earlier in the year.
For 2022 we are keeping an eye out for a number of other announcements. On 15 June, EFRAG (the European Financial Reporting Advisory Group) will provide their draft guidance on a corporate sustainability reporting standard. Around the same time, IFRS is set to publish the first batch of climate-related disclosure standards. In a more focused part of the market, the recently established Taskforce on Nature-related Financial Disclosures (TNFD) will announce the first beta version TNFD framework in Q1. The TNFD will apply the same four principles as the TCFD but look to flesh out the nature-related framework for such reporting. On the back of all this, we will see corporates continue to advance their non-financial reporting practices, which should also provide for some interesting observations.
5) Taxonomy goes beyond ‘Climate’
The EU Taxonomy is the centrepiece of the European Commission’s broader work on sustainable finance. On the back of years of drafting, discussing, consulting and amending, the Delegated Acts on Climate were formally, and finally, adopted fully into law by 1 January 2022. However, instead of celebrating, the market is currently in a frenzy around further amendments to potentially include nuclear and natural gas in the list of economic activities.
On 2 February the European Commission announced the new amendments, now subject to commentary from the co-legislators (the European Parliament and Council) for a period of four months, with a possible two-month extension. Although such trialogues could result in the Parliament and Council rejecting the proposal, many expect this to be unlikely. Much criticism has already been hauled at the European Commission for its decision to include nuclear and natural gas, with some countries even contemplating filing legal actions against the Commission. Regardless of the outcome, it is evident that this will be a key driver of debate in the market during 2022.
Outside of the specific amendments to the Climate Delegated Acts, 2022 will bring further clarity on a number of additional Taxonomy-related areas. First, the draft Technical Screening Criteria (TSC) for Agriculture are expected to be announced. The agricultural TSCs were originally intended to be announced together with nuclear and natural gas but have been delayed due to complexities in the scoping and threshold setting. Second, we should also see draft TSCs for the remaining four environmental objectives of the EU Taxonomy, namely water, circularity, pollution and biodiversity. The addition of the remaining objectives will provide for a more holistic assessment of sustainability and widen the scope for many companies previously not eligible for the Taxonomy. Finally, the European Commission is due to report on how the Taxonomy can be extended to cover social objectives and activities that are significantly harmful to environmental sustainability.
Nordea Sustainable Finance Advisory
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