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Two key ingredients for your Sustainable Finance agenda
Last year, as part of the EU’s commitment to fighting climate change and moving to a low-carbon economy, the European Commission published its Action Plan for Financing Sustainable Growth. This Kempen newsletter looks at two key ingredients of this plan, which could prove critical in building a more sustainable financial system and a climate-neutral EU by 2050.
The two elements are:
1. Establishing a sustainable finance “taxonomy” - to ensure everyone shares the same definition of what is ‘green’ or ‘sustainable’ and what is not.
2. The creation of two climate benchmarks - to help investors better understand the relative carbon impact of their investment
Currently there are many different definitions in the market, for example some energy investors categorise natural gas or nuclear assets as sustainable and others do not. So just as the introduction of the metric system in the 18th century helped clarify the unworkable system of having different units of measurement within and between countries, hopefully the taxonomy will unite the market behind common definitions.
Over the longer-term the standardization of sustainable investment product classification will also be translated into sustainable finance labels making it easier for any institutional or retail investor to understand whether a fund or financial product is indeed green or not.
“Investors can use the taxonomy to express investment preferences, select truly green businesses, design new financial products, measure the environmental performance of a security or product and to engage with investees.”Eszter Vitorino-Füleky, Senior Responsible Investment Advisor
The EU benchmarksAnother issue with sustainable finance has been the lack of an established framework to measure how well an investment portfolio aligns with the key goals of the Paris Agreement – i.e. to keep global warming below 1,5C. In June, the EU tried to address this issues by launching the interim TEG report on the two EU Climate Benchmarks.
If the taxonomy provides the list of potential ingredients, the benchmarks provide two recipes for success, i.e. the benchmarks define the quantitative progress a portfolio must achieve in terms of emissions reduction to align with a pathway to the Paris goals.
The two climate benchmarks are:
- An EU Climate Transition Benchmark (EU CTB)
- An EU Paris-Aligned Benchmark (EU PAB)
Why are these policy developments relevant for institutional investors?
Businesses can use the taxonomy to raise capital and demonstrate the environmental considerations of their activities.
Investors can use the taxonomy to express investment preferences, select truly green businesses, design new financial products, measure the environmental performance of a security or product and to engage with investees.
A catalyst for engagement
Investors can also take the opportunity to engage with companies on the importance of climate transition. The EU’s proposed taxonomy and benchmarks make it timely for investors to ask investee companies to formulate a Paris-Aligned strategy and more robust climate related disclosures. These should be aligned with the main reporting standards and frameworks, which are also listed in the updated European Commission Guidelines on reporting Climate-related information.
Investors and companies leading the way
As part of the Institutional Investors Group on Climate Change, Kempen works together with several other investors to push for corporate carbon data and emission reduction targets. Especially companies in carbon intensive industries, such as oil & gas, transport, utilities, and manufacturing need to provide data on their emissions.
More about this subject
We organized two webinars about responsible investing. During the webinars we addressed the question on how to implement ESG principles as an integral part of an investment process, and taking the next steps on your sustainable journey.