The UK’s national standards body, BSI, has released a world-first green finance guidance standard to help the financial sector define globally applicable sustainability standards. John Barwise looks at what the new standard might mean for UK businesses and the drivers for a sustainable finance sector.
BSI’s new sustainable finance standard, PAS 7340:2020 Framework for Embedding the Principles of Sustainable Finance in Financial Services Organizations. Guide, is the first guidance standard in a five-year standards development programme to help the financial services sector define best practice for sustainable finance.
The development of PAS 7340 and other sustainable finance standards in the programme will have an influence on how the finance sector assesses the risks and opportunities of its current and future investments.
Why do we need sustainable finance?
Finance and investment play a key role in shaping the world in which we live and is a major influence for change in sustainability. According to a recent report from the WWF, the failure to integrate environmental factors into financial decisions puts capital at unnecessary risk. For instance, there is substantial financial risk for investments in fossil fuels that could easily become stranded assets as the global community sets a course to reduce global warming.
WWF and others also argue that to succeed in tackling some of the most pressing environmental and climate issues, huge amounts of capital need to be shifted to more sustainable, low-carbon growth initiatives, such as renewables and sustainable agriculture. This is already starting to happen through the UN’s Sustainable Development Goals (SDGs) which set a global framework for governments, investors and corporations on prioritising sustainable growth.
The UK is the fifth largest economy after the USA, China, Japan, and Germany, with a gross domestic product (GDP) of £2.11 trillion in 2018 and is the world’s leading net exporter of financial services, generating an industry trade surplus of £68 billion.
As such, the UK’s financial sector is a major influence in how investment decisions are made both here in the UK and oversees.
The role of BEIS
The Department of Business, Energy and Industrial Strategy (BEIS) initiated the UK’s approach to sustainable finance last year with the launch of its Green Finance Strategy which outlines proposals for decarbonising all sectors of the UK economy and also highlights the role of the financial sector in meeting UK commitments to net zero by 2050.
The strategy sets out plans to increase investment in sustainable projects and infrastructure in line with the Government’s longer term economic plan, which incorporates the UK’s Clean Growth Strategy, 25 Year Environment Plan and Industrial Strategy.
The Government aims to ensure financial risks and opportunities from climate change are integrated into mainstream financial decisions and that the availability of finance is increased in order to take advantage of the “economic opportunities” that come with sustainable low carbon investment.
In a foreword to the strategy, former BEIS secretary Greg Clark said: “Meeting our objectives will require unprecedented levels of investment in green and low carbon technologies, services and infrastructure. Green finance will be central to providing the flows of capital we need.”
The strategy moves beyond just funding green projects to incorporate proposals for decarbonising all sectors of the UK economy through the 2020 which the Government believes will lead to strong, sustainable and balanced growth in the future.
BSI’s sustainable finance programme
BSI has set out a five-year sustainable finance standardisation programme in collaboration with BEIS’s green finance strategy, to help define globally applicable sustainable finance standards for the financial sector.
Sustainable finance can help tackle pressing environmental, social, economic and governance challenges but, according to BSI, a lack of common definitions and varying industry practices is holding back the international spread of sustainable finance, and undermining consumer confidence in sustainable products.
BSI’s sustainable finance programme aims to address these concerns and includes three new Publicly Available Specifications (PAS) that target key areas where a coordinated approach would achieve the biggest benefits.
PAS 7340:2020Framework for Embedding the Principles of Sustainable Finance in Financial Services Organizations. Guide, sets out the principles for financial services organisations to align their activities with the UN SDGs, and other sustainability initiatives. The specification has now been published and is supported by a Strategic Advisory Group, including a number of financial services representatives such as CFA Society of the UK, consultancy E3G, Lloyds Banking Group, the UK Sustainable Investment and Finance Association, the Principles for Responsible Investment, and asset manager WHEB Group. PAS 7340 is explained in more detail below.
PAS 7341 (not yet published) Responsible and Sustainable Investment Management. Specification will include a set of requirements to establish, implement and manage the process of integrating environmental, social and governance criteria and other sustainability considerations into investment management. It is intended to be used by anyone managing investments directly including investment management firms (eg fund/asset managers) and investment consultants and intermediaries in organisations of any size, as well as asset owners.
PAS 7342Product Fund is the third specification in the current series. This specification has been proposed and is in the early planning stage. It will deal with sustainable finance products and funds.
PAS 7340 sets out five sustainable finance principles and provides guidance on approaches to sustainable finance within organisations. It also provides a common terminology that can be used by financial services organisations of any size and type, which may be particularly useful to small and medium-sized organisations.
The PAS is applicable to all organisations from across the financial sector, including:
intermediaries (eg consultants and pensions advisors)
private and public sector organisations (eg voluntary organisations)
central and local government
Sustainable finance principles
PAS 7340 is design to encourage those in the finance sector to have “clear, high-level statements of its purpose, values and mission that recognize its sustainability commitment” and a focal point for action. The five principles to help organisations align their business with the transition to a sustainable economy are as follows.
Governance and culture — embedding sustainability across the organisation.
Strategy alignment — aligning business strategy with sustainability objectives, including risk management.
Impact assessment — identifying and managing business life cycle sustainability impacts.
Stakeholder engagement — working with others to deliver collaborative solutions to support sustainability objectives.
Transparency — including accountability and public reporting.
Common terms and definitions are a key element of all PAS specification and ISO standards. PAS 7340 incorporates many of these including generic definitions for ESG, greenhouse gases, circular economy and life cycle. But it also includes terms relating directly to the finance sector including, for example:
responsible investment — consideration of the impact of material factors
responsible banking — alignment of a bank’s business strategy with society’s goals as expressed in the SDGs and the Paris Climate Agreement
screening of investments — range of investor actions related to the construction of portfolios
green bonds — where the proceeds are exclusively applied to finance projects with positive environmental outcomes
natural capital — elements of nature that produce value or benefits to people, including ecosystems, species, freshwater, land, minerals, the air and oceans, as well as natural processes and functions
climate finance — financing drawn from public, private and alternative sources that seeks to support reduction in greenhouse gas emissions and other mitigation and adaptation actions that address climate change
stranded asset — an asset that has suffered from unanticipated or premature write-downs, devaluations or conversion to liabilities.
PAS 7340 includes three informative annexes to help organisations interpret related documents and terms that can be useful in establishing and implementing the specification in practice.
Annex A relates to the United Nations Sustainable Development Goals (UN SDGs).
Annex B covers Financial services sustainability initiatives.
Annex C explains Sustainable finance definitions and taxonomies.
Financial services organisations are likely to find they are at different stages in their progress towards sustainable finance. A maturity matrix can help chart progress and involves completion of a simple matrix with each cell identifying levels of progress against sustainability.
The format of the matrix can be based on individual principles, such as impact management, or other metrics such as lifecycle stages. Assessments may be conducted by business unit or business function and then combined to give an overall organisation perspective. The following example illustrates how the maturity matrix works in practice.
Ad hoc responses to challenges/comments
Progress made in the wider identification of stakeholders
Efforts to understand expectations of interested parties including emerging issues
Staff involved in an inclusive process contributing to internal decision-making
Working with external stakeholders (eg trade bodies, NGOs, regulators, etc)
Clear establishment of two-way dialogue with a range of stakeholders using a range of methods
Reference: PAS 7340, BSI.
The matrix format allows organisations to monitor progress to full maturity for a particular principle. Organisations should have an ongoing process of performance improvement and target setting in order to achieve their aims of sustainable finance.
The International Standards Organization (ISO) is currently in the process of developing a new framework standard for sustainability: Framework for Sustainable Finance. Principles and Guidance. BSI has been appointed secretariat of the new international committee on sustainable finance, for the integration of sustainability considerations and environmental, social and governance practices into institutional investment decision-making and wider finance management.
Given BSI’s current progress on producing the UK sustainable finance standard, it is likely that much of what has been developed so far with PAS 7340 will be used to produce an international sustainable finance standard in the future.
PAS 7340:2020 is available from the BSI shop.
Last reviewed 28 February 2020