World Investment Week Sees Regulators Highlight Sustainable Finance
Held from 7th to 13th October 2024, the International Organisation of Securities Commissions (IOSCO) World Investor Week was dedicated to empowering and protecting investors globally by highlighting critical areas such as sustainable finance. As a former member of the New Zealand Securities Commission, I’m heartened to see a focus on how sustainable finance is revolutionising investment opportunities, albeit with challenges.
A Sobering Statistic
As part of World Investor Week, IOSCO held a webinar about sustainable finance. Kris Nathanail, IOSCO Director of Policy, began the session by acknowledging the growing interest and complexity in this area.
“It can sound very confusing and scary for investors as they look to make the right decisions for both their investments and what feels right for them from an environmental, social or governance perspective.”
Kris highlighted the challenge by saying, “The statistics here in Europe suggest that only 14% of funds that market themselves as ESG are actually complying with that ESG marketing when it comes to their investment strategy.”
This underscores the importance of independent, ethical investment advice – as discussed in my World Financial Planning Day blog, an initiative supported by IOSCO.
Panellists with Purpose
The panellists, João Pedro Nascimento, Chair of the Brazilian Securities Commission, and Julia Leung, Chief Executive Officer of the Securities and Futures Commission Hong Kong, were introduced as “CEOs of two of the biggest jurisdictions in the world in terms of the impact they can play.”
“Brazil has many reasons to understand sustainable finance,” João explained. “We believe we can attract more issuers and investors coming from this global agenda, and we understand our country should take a leading position on that for many reasons that are also related to our natural location. We are a country of continental proportions. We have the largest native vegetation preserved on Earth. Our energy sources are mostly renewable, with the largest reserve of carbon credits on the planet. We understand sustainable finance and the green economy as a global market, and… we know cooperation, harmonisation and comparable standards will be necessary to grow and have a lasting impact on this agenda.”
Brazil Leads the Way
In October 2023, Brazil was the first country to formally adopt the IFRS (International Financial Reporting Standards) sustainability standards S1: General Requirements for Disclosure of Sustainability-related Financial Information and S2: Climate-related Disclosures outlined by the International Sustainability Standards Board (ISSB). These align with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations and the Sustainable Accounting Standards Board (SASB) criteria.
IOSCO endorsed these standards in July 2023 as serving the needs of the global capital market. They offer substantial benefits for raising standards globally and for analysts conducting comparative assessments to elevate the quality of investment evaluations in national and international environments.
João says that Brazil is “taking advantage of this leading position” with initiatives such as issuing bonds. A recent Reuters article noted that the government is issuing $2 billion of ESG bonds per year with “use of proceeds: half environmental, half social.” A share of ESG money raised goes towards Amazon programmes. Over six million square kilometres—more than half in Brazil—the Amazon absorbs vast amounts of greenhouse gases and is home to more than 10% of all known animal and plant species, the highest density on Earth. An earlier Reuters article described how a UK bank proposed a $10 billion Brazilian government bond specifically designed to halt the Amazon rainforest destruction.
João said the private sector is also issuing green equity and bonds.
“A lot of companies are paying attention,” he adds. “This is an opportunity for our country to attract more issuers and investors and better position our corporate law and capital market regulation.”
Asia Sets and Seeks to Support Standards
“Asia is home to the fastest-growing economy and responsible for half of the world’s emissions,” said Julia. “So, it's important that sustainable finance be taken seriously.”
Hong Kong has committed to adopting the IFRS standards for sustainability disclosures in corporate reporting. This is essential for access to international capital to help companies make the necessary “huge reduction” in carbon emissions “from where they are to carbon neutrality.”
Large, listed companies—70% of the Hong Kong Stock Exchange’s market capitalisation—must “comply or explain” in 2025, and compliance will be mandatory from 2026. The requirement for larger companies has a positive chain reaction, as it requires businesses in their supply chains to report and reduce carbon emissions.
“Just setting prescribed standards is not the only thing,” Julia explained. “More important is building the ecosystem to support the reporting.” Public and private sectors collaborated to create calculators and other tools to help SMEs (Small and Midsize Enterprises) with their reporting.
“They're an important part of the supply chain… how fast you move depends on moving the different parts of the economy, including the SMEs.”
A Once-in-a-Lifetime Shift
João recommended focusing on the value added.
“We need to show the world that by adopting these behaviours, market participants are more attractive... We need the whole ecosystem to understand that we are entering a new era.”
“This is a once-in-a-lifetime economic shift in the economy,” Kris reflected. “Perhaps in a few decades or centuries, they'll think of this time as equivalent to the Industrial Revolution.”
We’ve come a long way since 1984 when The Stewardship Fund was launched, the first UK ethical fund. At the recent Responsible Investment Association Australasia (RIAA) Conference, I mentioned the challenges I faced back then when researching this field. The conference organisers requested that I provide a question for industry participants. I asked: “Why was The Stewardship Fund dubbed ‘the Brazil fund’?” The multiple-choice answers were:
A. It helped address environmental concerns.
B. It included companies based in Brazil.
C. It allocated funds to protecting rainforests.
D. Most financial advisers and fund managers thought the idea was nuts.
After decades of advocating for sustainable and ethical investment, I’m encouraged to see more acceptance. However, discerning authentic, ethical substance from marketing spin is challenging for investors and an essential role for advisers.