The European Union is betting that its future climate investment standard will be adopted worldwide
The European Union is counting on its future climate investment standard to be adopted globally because of its green credibility. However, tighter guidelines from the International Sustainability Standards Board on how companies should disclose factors such as their carbon emissions have been well received. Those that don’t have to comply with EU rules, probably won’t.
Benchmarks on what exactly counts as sustainable are in high demand, as comparisons are difficult to make. This has led to a wide divergence of opinion on what counts as a sustainable investment.
Morningstar, which applies strict definitions of environmental, social and governance measures, projects that $2.3 trillion will be invested in sustainable funds in the EU in the first quarter of 2023, representing 84% of the global total.
On the other hand, according to the U.S. Sustainable Investment Forum, assets in the U.S. totaled $8.4 trillion same time. That’s down from $17.1 trillion the year before, after the Securities and Exchange Commission tightened definitions.
Greater global uniformity in environmental disclosure would therefore be a step forward. However, there is a fundamental difference between the ISSB and the forthcoming EU guidelines.
The ISSB sees its role as providing information to investors, not dictating policy decisions. In contrast, the EU openly states that it wants to force companies to consider not only their profits, but also their impact on the planet.
Its rules will use a „double materiality” framework to try to measure outcomes related to human rights and other broad factors, not just climate-sensitive capital planning.
Anyone doing business in the EU will have to follow the Brussels rules as they become available. But the ISSB already has a head start.
Last month, it received the backing of Group of Seven leaders and was endorsed by the likes of Vodafone Chairman Jean-François van Boxmeer, Bank of America Chief Executive Brian Moynihan and former U.S. securities regulator Mary Schapiro.
The U.S., which has long favoured its own accounting standards, will likely default to the ISSB’s voluntary green standards: With „woke” investing in the political crosshairs and ESG as a concept out of fashion, SEC is in no hurry to adopt its own rules, much less European ones.
Ideally, all sides would agree on common ground. ISSB proponents want companies’ ISSB filings to count toward compliance with EU rules, while EU financial services chief Mairead McGuinness says Brussels will align with global requirements.
However, she promises only „as much commonality as possible.” Sceptics worry that the EU may end up needing a costly separate process because its approach is both broader and more detailed to measure the impact of policies.
This expected divergence is „not ideal,” said ISSB chief executive and former Danone CEO Emmanuel Faber. Green financial standards may not be more uniform than accounting standards.