The International Monetary Fund (IMF) has released a new paper designed to reduce instances of “greenwashing” and create a baseline of comparability for activities in the financial sector to better align efforts to combat climate change per the requirements of the Paris Agreement and the 2030 UN Sustainable Development Goals (SDGs).
The aim of the report is to provide policymakers, regulators, and private sector entities with guidance in identifying implementation elements, benchmarks, and frameworks that can serve to provide a minimum baseline of comparability amongst all actors operating in the financial sector.
It also serves to provide the financial sector (especially private sector investors) with the means to more accurately identify projects and investment strategies aligned with the furtherance of reducing greenhouse gas emissions or combating other forms of climate change, including the proposal for creating an international framework of taxonomies, methodologies, disclosure, and transition-planning frameworks to serve as a tool for benchmarking capital allocation and reduce instances of so-called “greenwashing” (labeling ordinary business activities as being “green” or sustainable when there is limited or no evidence of such activities meriting that label).
The Paris Agreement of 2016 is a legally binding international treaty on climate change, however, its 196 signatories are primarily nation-states which may have only limited jurisdiction of actors operating in the financial sector, particularly those in the private sector. Furthermore, the Paris Agreement does not include any specific guidance on aligning financial activities with the furtherance of the climate change goals or any international standards or frameworks for creating a minimum baseline of comparability between stakeholders in the financial sector beyond some generalized requirements outlined in the Enhanced Transparency Network (ETF), which focuses more on operational transparency rather than the adoption of universal standards for climate investments.
Urgent need for climate information architecture
The genesis of the new IMF report came from a resolution of the G20 Sustainable Finance Working Group to create new high-level principles on climate change approaches and thus establish and implement a universal climate information architecture. Currently, no such climate information architecture exists, and the IMF has stated that this lack is a serious impediment to scaling up or “mobilizing” private sector investments in combating climate change in emerging markets and developing countries (EMDEs). In short, there is currently no reliable method by which private sector finance can accurately assess whether or not a given investment or project actually aligns (or not) with the obligations of the Paris Agreement treaty, leaving every participant to make that determination according to their own methodology.
The recently published IMF report, however, does not set out to present a fully-fledged international climate information architecture or reporting framework but to fill in the current gap by providing several technical solutions that can be implemented without delay in order to promote greater interoperability, comparability, and credibility of climate change investments and projects. It also lists steps to be taken to help identify carbon-intense activities and existing projects that should be targeted for decarbonization or phase-out, particularly those located in EMDEs.
The adherence to these six guiding principles serves as the bedrock for the IMF’s new proposed guidance for ensuring that actors in the financial sector (particularly private sector investors) can ensure greater interoperability and alignment with the furtherance of the requirements of the Paris Agreement and the UN 2030 Sustainable Development Goals.
Climate frameworks blooming
In 2021, the G-20 Sustainable Finance Working Group was tasked with developing a sustainable finance roadmap to give G20 countries, multilateral institutions, and other stakeholders from the development world a framework for implementing the sustainable finance agenda outlined in the 2016 Paris Agreement. The new IMF report is the latest contribution to that effort.
Starting with the Kyoto Protocol of 1992 and encompassing the Millennium Development Goals (MDGs), Sustainable Development Goals (SDGs), and the Paris Agreement, a large number of different alignment approaches towards combating climate change have flourished. Nonetheless, currently, there is no agreed-upon benchmark or standard for determining whether an asset or investment is actually “green” in nature or how effective any given asset or investment is at achieving objectives such as biodiversity preservation, biodiversity restoration, pollution reduction, or even a precise threshold for what can be labeled a “low-carbon” activity. In addition, there is significant overlap between financial sector activity seeking to further the UN Sustainable Development Goals (SDGs), only some of which are specifically related to climate change.
There has been progress made on an entity level (primarily sovereign nations and multilateral institutions) in adopting common frameworks, methodologies, and governance for better alignment on achieving sustainability targets (including combating climate change). However, asset-level approaches currently lag much further behind, making it difficult for private sector investors to be able to accurately and independently assess the green “bona fides” of any given project or instrument (such as a government bond).
Although few details were provided at the granular level for developing such taxonomies, methodologies, reporting standards, and precise definitions for creating that that more interoperable and universal climate change information architecture, the new report from the IMF is an important first step in harmonizing the efforts of all stakeholders in the financial sector (particularly those in the private sector) towards implementing the Paris Agreement as well as other climate-related sustainable development goals while actively discouraging all business activities which are not, at least on some level, in alignment with combating climate change.