Insights
Legal Framework for Impact: The rationale of investing for sustainability impact BY United Nations Environment Programme Finance Initiative (UNEP FI)
According to UNECE, standards and related certification and labelling schemes are key features of products and services in a sustainable supply chain. The number of “green” schemes available has grown exponentially in the last few years and includes over 400 eco-labels alone. However, standards and eco-labels can constitute barriers for small and developing-country producers who may lack the resources required to prove compliance, or for whom the standards are inappropriate.
Nevertheless, standards and regulations are powerful instruments for driving the green growth policy framework and the Sustainable Development Goals (SDGs), because they provide incentives to improve energy efficiency, emissions standards, product market competition, resource use, trade and foreign direct investment, and private sector voluntary initiatives. By informing consumers about products and production processes and providing clear policy signals to businesses, these tools can be effective in achieving environmental objectives and facilitate best practices in sustainable goods and services markets.
Given the relatively recent emergence of green finance, standards and regulations are still being created, with a strong reliance on voluntary regimes and disclosure. The European Union creates a taxonomy to help define what counts as ‘green’, and to create market standards for green investment funds and green bonds.
There is a wide variety of frameworks and tools to support better green finance but a common set of minimum standards on green finance will be essential for efficient allocation of financial resources to green projects and assets, market and risk analysis, and benchmarks. Common standards are also important in mitigating the risk of greenwashing and greater consistency of disclosures.
The role of data and reporting, based on clear standards around sustainability, continues to evolve, with the Task Force for Climate-related Financial Disclosures (TCFD) providing industry-standard recommendations on climate change and the French Article 173 requiring disclosure on ESG issues for companies and the finance sector. This is likely to lead to similar legislation around the world. The SDGs can also provide an important framework and standard approach to help investors contribute to sustainable development.
Governments are increasingly turning to regulation to respond to the stress placed on the environment from climate change, biodiversity decline, water stress, and pollution. The number of environmental laws have increased 38 fold since 1972 according to a UN Environment report. Businesses that begin responding to these challenges before legislation is enacted can save time and money by having time to prepare and plan.
In addition to complying with laws and regulations, companies are increasingly required to meet environmental standards and certification schemes, which are used to provide consumers assurances that a product or service has certain environmental characteristics. Standards can cover a range of issues including energy efficiency, greenhouse gas emissions, recycling, biodiversity protection, eco-design and product claims such as ‘biodegradable’, ‘carbon neutral’ and ‘organic’. Tools such as the International Trade Centre’s Standards Map allow businesses to compare and decide on which standards are relevant for their activities.
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Batumi Initiative on Green Economy (BIG-E)
