Rachel Hart

By Rachel Hart
Lawyer, LBMA

Sustainable Finance around the World In boardrooms across the world this year, a record number of resolutions were passed to address Environmental, Social and Governance (ESG) issues. This has been paralleled by a boom in ESG investing: assets under management by ESG-oriented funds were valued at over $1 trillion in August. While one hopes the momentum for ESG is as sustainable as the initiatives themselves, how has the legislation kept up? Without an agreed global standard for assessing ESG initiatives, what kinds of regulatory oversight are we seeing across the world’s nations?

Gold and ESG

Over the last decade, we have seen sustainable finance initiatives grow from green bonds to ‘conservation premiums’ on retail gold products. Gold represents a truly sustainable product thanks to its almost indestructible state. Once gold is mined or recycled, its life cycle might begin as a bullion bar and continue as a jewellery piece or part of a smartphone, only to be reprocessed and repurposed indefinitely.

This circular economy of gold as a commodity means that it ought to be a popular choice for ESG investing and other sustainable finance initiatives. Yet, gold might be seen as a risk to ESG principles. Gold can raise concerns related to the environment, conflict financing or contributing to illegitimate markets.

While ESG thrives around the world, for LBMA, it is important to create responsible demand for responsible gold. LBMA’s Responsible Sourcing Programme was launched in 2012 to avoid contributing to human rights abuses, conflict and terrorism financing, while complying with high standards of anti-money laundering practices. Last year, the Responsible Gold Guidance was expanded to audit Good Delivery refiners on ESG issues. LBMA also recognises the value of public disclosure to further ESG aims and reflects this in its three-year strategy, running until 2022.

G20 Nations

The words ‘disclosure’, ‘transparency’ and ‘public reporting’ are ubiquitous across most ESG regulatory initiatives. The G20 Financial Stability Board highlighted their significance within its Task Force on Climate Related Financial Disclosures. The Task Force was created in 2015 to mitigate the potential impact of climate change within the financial markets. If climate-related events led to a sudden fall in asset prices, creating risk of financial instability, this could be mitigated by better disclosure by firms across the industry. Reporting data on governance, strategy, metrics and targets can help to price the risks better in advance.

EU

The EU has developed several initiatives to promote ESG throughout the financial markets. The European Green Deal supports the EU’s aim of being climate neutral by 2050. Next year, the EU regulation on Sustainability-Related Disclosures will require ESG considerations to be integrated into investment decisions by the larger players in the industry.

The EU is also considering a carbon border tax. This would involve assessing the CO2 footprint of goods imported into the EU and applying a graded tariff. Not only would this encourage trade with more ESG-geared nations, it would incentivise those with a heavier footprint to ‘go green’.

UK

While the EU has arguably led the path for sustainable finance and any associated regulation, the UK may aim even higher. From January 2021, Brexit will provide the UK with the unique opportunity to build on existing EU standards as a minimum. Last year, the UK Government established its Green Finance Strategy. This encourages investment in green initiatives while developing a more sustainable financial market. More recently, the Government issued standards for asset managers to establish, implement and manage integrating ESG principles into British investment funds. The UK also aims to achieve net-zero greenhouse gas emissions by 2050.

China

In October, five Chinese Government agencies launched ‘Guiding Opinions’ to promote investment and financing to address climate change. The agencies will work to establish incentives for local firms to develop ESG finance products and provide financial support to ESG projects. The green credibility of these products and projects will be verified by a third-party audit system. The Guiding Opinions follows a recent commitment for China to become carbon neutral by 2060.

India

Since 2012, the Securities and Exchange Board of India (SEBI) has supported ESG-related disclosures. SEBI requires its top 500 companies to publish an annual business responsibility report, which must consider product life cycle sustainability, human rights and the environment, amongst other issues.

In October, the UK and Indian Governments announced a joint statement to ensure their respective economic recoveries post-COVID-19 are as sustainable as possible. The UK and India have also established a bilateral Sustainable Finance Forum, through which they will collaborate on common international disclosure statements and work together to develop the sustainability of the wider financial industry.

If you would like to read more on sustainable finance, Cambridge University Press has recently published Making the Financial System Sustainable. Edited by LBMA’s Chairman, Paul Fisher, the book comprises essays by various practitioners, thought leaders and experts from across Europe.