Raising the standard: sustainable investment
Rick Gould speaks to John Shideler and Hayden Morgan about why we need ISO’s new sustainable investment standards, and what they will deliver
Sustainable investing meets the needs of the present without compromising the ability of future generations to meet their own needs. And according to the World Economic Forum, we need a lot of it – it has determined that from this year we should be investing about US$5.7trn annually in green infrastructure. When it comes to energy, the International Energy Agency estimates that we must invest at least US$53trn during the next 15 years to stop irreversible climate change. Other organisations have calculated that even larger numbers are needed to avert major environmental, social and economic risks.
Where do international standards fit into this? “To avoid greenwashing,” says Hayden Morgan, convenor of the working group developing ISO 32210 Framework for sustainable finance: Principles and guidance. “Harmonisation, trust, transparency and credibility,” says John Shideler, who leads the ISO working group developing the ISO 14030 series of standards for green bonds and loans. In other words, they are the tools that enable investors to make sound, sustainable investments.
There are other important related standards in development, too (see Table 1), such as those for disclosing the climate change risks of investments, and the environmental credentials of projects and programmes seeking finance – but ISO 32210 and the ISO 14030 series will play the central role. What are they, and what benefits will they bring?
ISO 32210 – the framework and guidance ISO 32210 will be the leading standard from ISO/TC 322 , ISO’s new sustainable finance Technical Committee.
Morgan, associate director at the Green Investment Group (GIG), is an IEMA Fellow with more than two decades of experience in this field, including several years with the GIG’s predecessor, the UK’s Green Investment Bank.
The standard will serve as the hub and guidance for sustainable finance. “ISO 32210 has a wider scope than just environmental management – it covers all aspects of sustainability,” he describes. Crucially, ISO 32210 is a framework standard. “It is aimed at supporting organisations across the globe to integrate sustainability principles into their activities.”
“The ISO 14030 series will provide the clarity to determine both the eligibility and credibility of green bonds and loans”
Rules and codes-of-practice in their various forms are hardly new to the financial sector. However, the situation has become confusing when it comes to sustainability. “There is a proliferation of principles, guides, protocols, pledges and regulations, causing opaque and different market definitions for sustainable finance and thus leading to variable and inconsistent market practice,” explains Morgan. “This also creates confusion among stakeholders and shareholders, as well as a potential lack of trust in a nascent but fast-growing market.” In other words, a hesitance to invest.
ISO/TC 322 is distilling the best of the rules and guidance in order to bring harmonisation. “ISO 32210 will build on existing practice, standards, initiatives and knowledge, and aims to bring clarity and consistency for market participants,” says Morgan.
ISO 32210 will also complement existing initiatives, providing market continuity and confidence. And confidence among investors is crucial. “It increases additional capital to finance the transition and mitigate risk,” says Morgan, while the standard itself will provide the essential element of credibility. “ISO 32210 will also deter inadvertent greenwashing and a misrepresentation of sustainability credentials. It increases coherence, consolidates, harmonises, extends reach and applies global best practice.”
The types of factors which led to the development of ISO 32210 are also the motivation for creating standards for green bonds and debts. How did these particular standards develop?
Green bonds and loans
In 2007, the European Investment Bank launched the first environmentally targeted bond, aimed at investments combating climate change; the World Bank has labelled such investments ‘green bonds’. Since then, green bonds have boomed shown enormous potential. Last year, according to the Climate Bonds Initiative, issues of green bonds reached US$257bn, up 51% from 2018, and the growth continues unabated.
Such growth is always accompanied by risks – particularly greenwashing in this case. At the same time, an assortment of proprietary standards, rules and guidance has emerged to support green bonds, including the Climate Bonds Standard, the Green Bond Principles, guidelines of the People’s Bank of China and the Green Loan Principles. All were intended to boost the growth of green bonds and loans by providing structure. However, the numerous definitions for green bonds and loans, coupled with the absence of unifying standard rules and criteria, have hindered investment. This is why ISO aims to provide harmonisation, structure, transparency and credibility through the ISO 14030 series.
“The ISO 14030 series will provide the clarity to determine both the eligibility and credibility of green bonds and loans, as well as a robust reporting mechanism for investors,” explains Shideler, who has worked in standardisation for climate-related fields for several decades and is president of change management organisation Futurepast. The ISO working group convened by Shideler – which includes another IEMA Fellow and colleague of Morgan, the GIG’s Adrian Barnes – has been developing the series since 2017, and its work in nearing completion. How has it evolved?
“We initially started by developing one standard,” says Shideler. “Then we realised we needed complementary standards for a taxonomy of eligible green-debt instruments, and another for verification. Part 1 of ISO 14030 initially covered both types of green-debt instruments, but we decided to split this into two to provide flexibility for the separate requirements of bonds and loans.” Additionally, because ISO 14030 is a certification standard, Part 4 for verification is needed.
What has the response been from the financial sector? “All of the major players are involved, such as the International Capital Market Association, the Loan Market Association and the Climate Bonds Initiative,” says Shideler. “We have been extremely fortunate to have good participation from the financial sector, including major banks, environmental NGOs such as the World Wildlife Fund and the European Environmental Citizens’ Organisation for Standardisation, and trade associations. This participation has been critical for Part 1 of ISO 14030 especially, and their participation has helped to produce standards that are consistent with the existing standards and principles.”
Rick Gould, MIEMA CEnv, is a technical advisor at the Environment Agency. He is writing in a personal capacity.