This month’s contributors of Second Opinions include speakers of the Institute’s “Race to Zero Webinar series: Taking the Greenwash out of Green Investment Products,” in which experts explore the topic of Common Ground Taxonomy and discuss the action needed to mitigate greenwashing as the market for green investment products develops in Hong Kong. The webinar will be held on 19 August. People can register on the Institute’s website and the recording will be available later.
Chris Joy FCPA, Executive Director, Standards and Regulation at the Hong Kong Institute of CPAs
In the past couple of years, business sustainability and green finance initiatives have developed from “nice to haves” to absolutely core elements of business strategy and resilience and corporate reporting. This demand for businesses to give prominence to more and more non-financial aspects in corporate reporting and for financial institutions to provide green financial products has come from a wide range of stakeholders – investors, regulators, governments, and society.
But there still remains a concern, and a threat, that “greenwashing,” that is promoting or marketing a company or product as environmentally friendly while in reality it is not, threatens to undermine the efforts of those committed to genuine sustainability objectives and credentials.
The accounting profession can contribute to countering greenwashing in two key areas.
Firstly, support and participate in the current work that is going on to develop a set of globally accepted sustainability standards to facilitate consistent and reliable non-financial reporting. The Institute has expressed clear support for the initiatives of the IFRS Foundation to establish an International Sustainability Standards Board, and locally is engaged with the Green and Sustainable Finance Cross-Agency Steering Group to accelerate the growth of green and sustainable finance in Hong Kong and to embed sustainability reporting into the Hong Kong corporate reporting framework. Consistent and reliable information is what investors want and companies that can meet that demand will benefit.
On that theme, the Institute’s annual flagship event has been renamed the Best Corporate Governance and ESG Awards, recognizing the increasing importance of good environmental, social and governance (ESG) and sustainability practices and reporting. The awards will recognize those companies and organizations that reflect overall best practices in corporate governance and ESG.
Secondly, accountants have the skills and mindset to develop trust in the green credentials of companies and financial products as trusted professional preparers and providers of information and by way of independent assurance of the provenance of corporate reporting and green financial products.
Since the December 2019 enhancement to the HKEX ESG Reporting Guide, Hong Kong-listed companies are encouraged to seek independent assurance for all or part of their ESG reports. To provide practical support, in December 2020 the Institute issued Auditing and Assurance Technical Bulletin 5 Environmental, Social and Governance (ESG) Assurance Reporting to assist assurance providers in performing assurance on ESG information in accordance with an established and recognized framework.
“Consistent and reliable information is what investors want and companies that can meet that demand will benefit.”
Alexandra Yeong, Senior Director of Investment Products, Securities and Futures Commission
Climate change is an imminent threat which could have a significant economic and financial impact. Global policymakers, industry participants and investors have stepped up their efforts to address the risks arising from climate change and to help mobilize capital to support the transition to a more sustainable future.
Sustainable investing and ESG products have grown rapidly in recent years, bringing new opportunities but also raising concerns, particularly about the consistency, comparability and the risks of greenwashing. Differing sustainability reporting standards and the lack of standardized terminology to describe sustainability-related products have resulted in inconsistent and, at times, misleading disclosures, which may ultimately undermine investors’ confidence in sustainable investing.
One vital effort to promote consistency and comparability in sustainable investing is the use of taxonomies that provide a common language, enabling the industry and investors to identify and classify which activities are considered to be environmentally sustainable. This will help channel investments into sustainable activities and reduce opportunities for greenwashing.
The Green and Sustainable Finance Cross-Agency Steering Group, co-chaired by the Securities and Futures Commission and the Hong Kong Monetary Authority, is working towards adopting the Common Ground Taxonomy being developed by the International Platform on Sustainable Finance Working Group on Taxonomies co-led by China and the European Union.
The Common Ground Taxonomy will provide transparency and consistency for investors and companies by providing a unique and common reference point to define which investments are considered to be environmentally sustainable. For investment products, the Common Ground Taxonomy could be used to identify what falls within the scope of ESG funds or sustainability-related investment products.
“Differing sustainability reporting standards and the lack of standardized terminology to describe sustainability-related products have resulted in inconsistent and, at times, misleading disclosures.”
Prashant Vaze, Senior Policy Fellow, Climate Bonds Initiative
There are several motivations for financial actors to develop a green taxonomy. Chief among them is to stop greenwashing, the cynical use of green language for marketing purposes while the underlying fund is itself not so different from its vanilla equivalent. My own organization, Climate Bonds Initiative, was established because of its founders’ desire to create a science-based categorization, a “taxonomy” of assets green enough.
To help a country meet the Paris Agreement objectives, organizations started to develop taxonomies. Climate Bonds Initiative’s first taxonomy was developed in 2012. This introduced the idea of criteria and thresholds that delineated which assets are green enough, and which are not. In 2014, the People’s Bank of China commenced work on the green project catalogue. In 2017, the European Union established a panel of expert advisors who recommended the EU create its own green taxonomy. Fast forward to today and we see a proliferation of taxonomies sprouting up around the world.
This brings us to a second motivation for developing a green taxonomy – to support international capital movement. One thing the world isn’t short of is international investors looking for green investment opportunities. But for capital markets to function with little friction, the providers of capital need to feel confident that the issuers of debt in emerging markets are using comparable definitions of “green enough” to meet the needs of their investment mandates.
With this mind, the International Platform on Sustainable Finance Working Group on Taxonomies, a grouping of (currently) 17 countries or regions, under the secretariat of the EU, which includes China, India and Hong Kong, have been working together to develop a Common Ground Taxonomy. This is a detailed comparison of, initially, the EU's and the Chinese most recent taxonomies to identify areas of common ground. It will act as a guide to aid international capital flows as well as a reference for jurisdictions looking to develop taxonomies.
There are substantial network benefits in applying common standards across countries and regions. The Common Ground Taxonomy – once it is published later in the year – could well be a useful next step in unlocking the flows of international capital needed to decarbonize emerging economies. Hong Kong as an important conduit in southeast and east Asia is right to take note.
“Providers of capital need to feel confident that the issuers of debt in emerging market are using comparable definitions of ‘green enough.’”