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Thursday, July 18, 2024

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PODCAST: More clarity expected as market to test out ESG finance-related taxonomies and policies next year

Standardization, or the lack thereof, in the ESG finance space may continue to be a sticking point for the Islamic finance industry, however, there are signs of potential gradual harmonization as policymakers navigate through the current “creative chaos” with regards to benchmarks and standards, opined a market expert. VINEETA TAN writes.

“I think right now, we are in this phase of the market where regulators are just starting to get involved this isn’t a word you often hear a lot when it comes to regulation; but I think we are in a bit of a creative chaos space right now,” shared Kristina Alnes, a director and the head of product at CICERO Shades of Green, an independent provider of second opinions on green bond frameworks. “Regulators are seeing the need to start harmonizing across different regulations. There’s a lot going on and it can be confusing, but in some time, it will become much clearer and we will have a much more global standard at some level, at least when it comes to green finance.”

According to Alnes, five jurisdictions have already implemented green finance taxonomies, with around 20 others considering doing so. The multitrillion sustainable finance industry has long been plagued by the lack of unifying or common guidelines. The ASEAN Green Bond Standards, for example, exclude fossil fuel, whereas the current EU taxonomy allows for some natural gas.

Market players have attributed the greenwashing of financial products to such discrepancies and a lack of clarity.
“There is a lot of greenwashing going on in the sense that there’s a lot of miscommunications about sustainability and green aspects. But a lot of it comes down to not malicious intentions, but a lack of really detailed understanding,” believes Alnes, who wrote the second opinion for Malaysia’s first green Sukuk issuance, the RM250 million (US$55.71 million) offering by Tadau Energy.

Using ESG ratings as an example, Alnes said that while it is a good measure of how well a company manages the ESG risks it faces, it does not really address how sustainable a company is.

“This is why you can get these oil and gas companies with really high ESG ratings. But this is sort of a difficult issue to unpack.”

Things are starting to change, however.

“Next year will be a very interesting year for green finance because this is the year that a lot of these taxonomies and regulations, including the EU, will be actually tested out practically in the market,” said Alnes, who also revealed that CICERO Shades of Green is working on a green equity concept, incorporating third-party reviews into the equity market.

This is an excerpt of an interview with Kristina Alnes, a director and the head of product at Cicero Shades of Green. To listen to the full discussion, log on to IFN Podcast.

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