On 12 November 2020, UK Finance issued a White Paper on Sustainable Finance.
The White Paper sets out UK Finance’s recommendations on principles that should underpin the measurement of multi-year commitments to sustainable finance. The principles were developed though discussion with a panel of a dozen firms and approved by UK Finance’s senior sustainability committee. UK Finance recognises that standard setters, legislators, regulators and others are looking to improve the quality of environmental, social and governance (ESG) reporting. The starting point for the White Paper was a desk-based review of 30 firms and a mapping of the standards and guidance followed. The principles have been developed with the aim of improving transparency and reducing the incidence of double counting within and across institutions.
The principles are:
- Principle 1 – Governance: firms making multi-year commitments to sustainable finance should build ESG considerations more comprehensively into their mainstream governance structure. This should be seen as part and parcel of board responsibility for purpose, strategy and the design of the business model intended to achieve these. Governance and controls should enable consistent categorisation of products, services and transactions when including them as qualifying towards a firm’s strategic commitments.
- Principle 2 – Definitions: sustainable finance should not be limited to environmental or ‘green’, and can instead cover any relevant ESG area, including by reference to sustainable development goals. Defined products and services should align to publicly available standards where possible. Within a UK and EU context, the EU taxonomy is likely to be of core relevance. Sustainable finance includes facilities for a specific ‘use of proceeds’, financing for businesses and organisations principally engaged in green or social activities; also transition-related activities, though the latter is dependent upon the client being able to demonstrate their progress towards decarbonisation. Key considerations in respect of facilitation, advisory, financing and investment are given, including on what counts as contributing to sustainable finance, are set out in the detail of Principle 2.
- Principle 3 – Measuring the contribution: there is a need to have clearly defined accounting policies and basis of preparation to consistently measure the contribution made by each credit institution. The primary purpose is to ensure that each firm is able to take credit for the extent of its contribution, while at the same time ensuring that collectively firms are minimising any double counting. The overarching principle is that investors and others should be able to add together all institutional commitments and form a consolidated view of what has been provided. Guidance is given in respect of facilitation, advisory services, financing and investment. It is noted that in the EU materiality for non-financial information is based upon a dual perspective of the impact on both the firm and the environment or society; while this has parallels elsewhere it is not a universally accepted concept.
- Principle 4 – Reporting and disclosure: transparency is key and it is expected that institutions with stated sustainable finance commitments will disclose: (a) overall governance over the sustainable finance commitment; (b) total commitment value, timeframe for the target value and the rationale/approach taken for selecting both the value and timeframe; (c) a quantitative breakdown of the products/services included within the commitment; (d) a narrative account enhancing understanding of the activities involved and the sustainability goals that are driving the firm’s approach, including reference to instrumental national or international initiatives; (e) definitions used, including any frameworks, taxonomies and methodologies as applied to each broad group of products/services, including key judgements, and their application in the collation, measurement and reporting of sustainable finance commitments. Impact assessment is a longer-term aspiration, as is external verification consistent with ‘reasonable’ assurance; shortcomings in data, definitions and metrics currently determine that ‘limited’ assurance is more realistic.
- Proportionality is a consideration and smaller firms are encouraged to apply the principles in a balanced way reflective of their geography and business mix.