New sustainable cities network sets out 10 principles on sustainable finance definitions

FC4S group warns of confusion and increasing costs

The new FC4S sustainable cities network has set out 10 principles to help in the development of sustainable finance definitions and taxonomies.

It’s an attempt to build a ‘shared language’ for green and sustainable finance given that definition and taxonomy is a “core question” for the group’s members, which are global finance hubs, according to a briefing note.

“There is no universally accepted definition, taxonomy or standard for investments, transactions financial products and services that can be considered ‘sustainable’,” it says.

The note flags up “concern that a proliferation of conflicting efforts could bring confusion and set back progress”.

It comes as a UBS Investor Watch survey found that confusion is holding back the widespread adoption of sustainable investment.

“A proliferation of conflicting efforts could bring confusion and set back progress”

FC4S is the International Network of Financial Centres for Sustainability, set up last year by a group of financial centres and the United Nations Environment Programme, which acts as convenor and secretariat. It currently has 17 members, from Astana to Zurich (and including London, Dublin, Paris, Hong Kong, Geneva, Frankfurt etc).

Now, following a meeting in Halifax, Canada ahead of the G7 Environment, Energy, and Ocean Ministers’ meeting, the network said “new definitions, standards, and classification systems for sustainable finance should be developed to avoid confusion among policy and regulatory authorities and a real risk of increasing transaction costs for financial institutions seeking to provide sustainability-related products and services”.

It comes as there are numerous efforts underway to develop “taxonomies” for sustainable finance such as that by the European Commission.

Canada’s Minister of Environment and Climate Change, Catherine McKenna, said the principles were an “an important step to advancing sustainable finance and shifting billions to trillions of dollars to clean investment across the globe”. The group holds its second network meeting in Shanghai on October 18-19.The 10 principles:

1. Scope: An important first step is to clarify the scope of the taxonomy with respect to sustainability themes, frameworks, and definitions – for instance, Environmental, Social and Governance (ESG) factors, green investments and sectors, climate change or other factors.
2. Purpose: Identifying the purpose and the different uses of a taxonomy is vital. Applications of taxonomies could include: ensuring consistency of the terms used in corporate reporting on real economy activities; promoting growth of new dedicated sustainable finance asset classes; developing labelled financial products (such as green bonds, which need to meet a certain process and performance threshold); helping to measure financial flows to sustainability-related sectors; or identifying particular assets within broad-based portfolios (such as the share of green revenues in an equity index).
3. Good Practice:* International good practice should be drawn upon, both to avoid ‘reinventing the wheel’ and to encourage a convergence of approaches.
4. Evidence: Market participants, public authorities and society need taxonomies that are clear and based on rigorous evidence. A strong empirical evidence base is a critical foundation for good capital allocation decisions.
5. Proportionality: The development of sustainable finance taxonomies needs to be proportionate, notably in terms of time and cost and “so that progress is not held back and costs are not excessive”. 

6. Mechanisms: The design of taxonomies – and the labels and standards that may follow – need to balance the use of voluntary vs. mandatory mechanisms for implementation.
7. Dynamism: Taxonomies should be dynamic; this could involve an annual review process.
8. Consequences: Taxonomies need to be carefully designed so that they do not have unintended consequences that could hamper the development of the market.
9. Coordinated: Classification frameworks for sustainable financial activities and assets need to be closely coordinated with other areas of market transparency and disclosure.
*10. Transparent: *This is important to allow market participants to determine whether taxonomy instruments are implementable.