Government action is vital in driving green finance

26 October 2023
Robust regulations and standardisation can increase the transparency and credibility of sustainable investments

Sustainable finance addresses a range of pressing global challenges. Tackling environmental issues through investments in clean energy, resource-efficient technologies and sustainable developments can help combat climate change, conserve biodiversity and reduce environmental pollution. It also plays a pivotal role in the world’s transition to net-zero emissions by channelling private money into carbon-neutral projects.

This is reflected in the EU’s Green Deal and Climate Law, which sets binding targets to cut emissions by 55 per cent from 1990 levels by a deadline of 2030, and to reach climate neutrality by 2050. To achieve this, the green deal plan aims to mobilise at least €1tn ($1.05tn) in sustainable investments by 2030.

ESG considerations

“At a corporate level, this is achievable by embedding environmental, social and governance (ESG) considerations and goals within the organisation’s culture. The financial decision-making process must have ESG considerations as pillars of success,” says Roberto D’Ambrosio, CEO of Belize-based Axiory Global.

These efforts are too often looked at as a burden rather than an opportunity, adds D’Ambrosio, and that is why awareness of ESG foundations and developments is crucial.

However, companies and investors often find it challenging to accurately measure and report the social and environmental impact of their investments.

 The banking sector is at a crossroads

Financial institutions use ESG data to identify companies with sustainable business practices, strong governance structures and positive societal contributions. This data is collected from sources such as company reports, public disclosures, third-party ESG rating agencies and other stakeholders, and it requires careful assessment.

Inconsistency in this data will affect the evaluation of the implementation of ESG goals and the accuracy of forecasts about their impact, especially as ESG efforts often take time to be fully implemented and for their benefits to materialise. It can also lead to 'greenwashing', which is becoming a growing concern as companies make claims of green credentials without a reasonable basis, or exaggerate their environmental and ethical credentials to boost customer loyalty.

“Long-term effects are hard to attribute, and external factors can confound results. Resource constraints and the risk of greenwashing further complicate matters. Overcoming these challenges requires standardised frameworks, improved transparency, technological innovations and stakeholder collaboration,” says Jelena Janjusevic, associate professor and head of accountancy, economics and finance at Heriot-Watt University Dubai.

“Due to the lack of standardisation in the reporting metrics, and the fact that in many cases the impact assessment is rather subjective, the risk of greenwashing becomes more apparent, especially where companies are at a risk of overestimating or willingly exaggerating their level of ESG awareness, readiness and strategic focus,” adds D’Ambrosio.

There is a need to introduce enhanced regulation around ESG accountability and performance tracking, and to develop standards for a global baseline of sustainability disclosures.

D’Ambrosio highlights the need to pursue the standardisation of reporting metrics and regulatory measures. This will enable a more efficient and less costly implementation of ESG goals while also facilitating a more accurate evaluation of such issues by investors and therefore increasing their trust in ESG-conscious organisations, he explains.

Leading by example

Although financial regulatory authorities are prioritising ESG regulations, guidelines and frameworks, the scale of action required cannot be underestimated, and many believe the onus should be on governments to take the lead.

Government policies and regulations encourage investors to consider ESG factors in their decision-making process and promote investments that align with broader sustainability goals. This helps to improve transparency for sustainable investment products and sustainability claims while also preventing greenwashing.

"Government policies and regulations play a critical role in shaping the growth and direction of sustainable finance initiatives,” says Janjusevic. “When governments set the framework, it encourages responsible and sustainable investment practices while also addressing systemic environmental and social challenges.”

Government bodies can foster ESG awareness and pursue related goals such as building incentive structures, promoting ESG-focused research and best practices, determining a timeline of obligatory renewable energy targets, conducting mandatory reporting to follow up on such goals and adhering to set timelines.

Policymakers in all major economic regions are upping the ante on regulations due to their net-zero pledges. The Japanese government, for instance, has introduced green bond guidelines to facilitate investments in environmentally friendly projects. In India, the Securities & Exchange Board encourages responsible investing by requiring mutual funds to offer ESG-focused schemes.

The UAE’s Sustainable Finance Framework is another example, says Janjusevic: "Initiatives aimed at facilitating green and sustainable finance products go a long way in helping address the challenges and gaps in the private sector’s efforts to strengthen its sustainability agendas."

Government action also influences investors' willingness to embrace ESG.

“Look at the net-zero announcements, including the UAE’s announcement in 2021 to reach this goal by 2050, and how they triggered a domino effect of rapid positive disruption in support of sustainability,” says Michelle Meineke, sustainability consultant at UK-based The Write Intel.

“Companies already trying to improve their sustainability significantly upped their ambition, and those on the sidelines largely stepped forward, publicly engaging in conversations that were unlikely to be on their boards' agendas even two years ago,” she adds.

Collaborative  efforts

To scale up the positive impact of sustainable finance, governments, financial institutions and other for-profit and non-profit players must come together to pursue ESG goals, which will ultimately allow the creation and maintenance of a healthy environment in which everyone can prosper.

“Very little can thrive in a vacuum of information, so rolling out clear, action-led and accountable policies and regulations that promote inclusivity and growth will act as key signposts for entities. Such transparency will boost confidence and, in turn, grease the wheels of progress,” says Meineke.

Establishing common frameworks and reporting standards is essential to ensure consistency and comparability when it comes to measuring impact. Coordinated policies and regulations across jurisdictions will create an enabling environment for sustainable finance.

“Collaborative efforts must include educational programmes that promote awareness of – and expertise in – sustainable finance within academic institutions, supported by partnerships between financial organisations, non-profits and governments to ensure the integration of ESG principles in curriculum and research initiatives,” says Janjusevic.

“Ultimately, these collective initiatives will create a harmonised ecosystem, attracting more capital towards sustainable endeavours, amplifying positive effects and driving the transition to a greener, more equitable global economy,” she concludes.

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