What constitutes a ‘sustainable’ investment? Establishing frameworks that detail conditions to regulate what investments can be claimed to be sustainable has been on the agenda of many jurisdictions globally in recent years. How are such frameworks established? What are some of the issues and challenges they are facing? How can we enhance their interoperability across the globe in an increasingly globalised world?
Join us in this special episode as we interview Nadia Humphreys from Bloomberg’s Sustainable Finance Solutions, who has extensive experience in the financial industry and in supporting the establishment of green taxonomies in the EU, UK, Singapore and Australia.
Listen to the episode here and see the transcript below!
Cassandra Chong (Cass): Hello everyone, and welcome back to season 2 of The GreenHouse. We are Cass and Xiao Wei, and we will be your hosts for today's episode. We are very excited to be back with discussions about sustainability in various industries, so stay tuned for our upcoming episodes.
Xiao Wei Thean (Xiao Wei): Today we've brought on a guest from Bloomberg, a global leader in delivering trusted data and insights about the financial market. Hello Nadia. Can you introduce yourself and walk us through your journey to a career in sustainable finance?
Nadia Humphreys: Hi Cass and Xiao Wei. Thank you so very much for inviting me to speak on your podcast. It's a real pleasure, I believe to kick it off for this school year. So, my formal role is that in Bloomberg, I manage our climate and ESG regulatory solutions, but in actual fact, I have kind of two key parts of my role. So the first is, as you rightly mentioned in your introduction within Bloomberg, design a set of data and analytical tools and solutions for Bloomberg clients, which are typically financial market professionals, to comply with their ESG regulatory requirements or to look at things like climate risk and adjust their investment where they perceive there is climate risk or where they perceive there is climate related investment opportunities. So that's what my team does in Bloomberg.
The second part of my role is also very interesting and hopefully we will come to that in this podcast. But it's building the tools that our policy leaders need to support a transition into a green or more sustainable way of working. So how can they mobilise financial markets to meet a deficit in funding that they have, to hit things like their net zero targets? And also, where corporates are performing in a low carbon way, how can they incentivize markets to provide cheaper access to finance for good environmental behaviour?
So, in that second part of my role, I sit advising a number of regulatory bodies. So, at the moment, I am an observer on the European Commission’s Platform for sustainable finance. I've just finished my role in the Green Technical Advisory Group for the UK Government, looking specifically at the adoption of UK taxonomy. I sit on GFIT, which is like a green finance technical expert group for the Monetary Authority of Singapore. And very recently I was appointed to the Australian Taxonomy Technical Expert Group to help design policy and instruments. But all of those I would summarise as trying to meet exactly the same objectives and trying to look at policy tools to support them in that need.
Cass: Thank you so much, Nadia. It was really interesting to hear how much variety there is in your role. You touched on the term “taxonomy” just now as you were mentioning the second part of your role. So, for our listeners who may not be familiar with the term taxonomy, what is it? And would you mind explaining why is it important for building a sustainable future?
Nadia: Yeah, absolutely. So, if we predate anything called a taxonomy, what we were talking about before is how do we identify what an environmentally sustainable company looks like? So, in the market previously, I identified something as being sustainable, typically, as the performance of a company relative to a set of what we call environmental data points, so that would be things like the carbon emissions of the company, whether that company produces any waste metrics (so, do they recycle? how much waste do they produce?), water recycling or water use metrics. And then I would look in a given sector. So, if I am looking, for example, at manufacturing for companies who manufacture a particular good, who manufacturers at lowest carbon or at lowest water consumption or lowest waste levels, those would be the ways that I identified a good performer. Now that may be OK. That's called the best-in-class approach, but one of the problems associated to that is a lot of governments had made commitments to hit net zero targets or to reduce their carbon through nationally determined contributions. So, this was through the Paris Agreement in COP, where they all signed an agreement to reduce carbon emissions. Now, in order to hit those goals, they need all the heavy emitting sectors in their economy to start to decarbonize. Now you could say, well, best in class should achieve that because you're constantly fighting to be best in class and the powers of the market would push for lower carbon emissions. But what we were observing was that that wasn't true. Carbon was continuing to grow.
So therefore, what people wanted to understand is what does environmentally sustainable actually look like. If I am a cement manufacturer or an energy producer, what do I need to do to comply with, for example, Europe's net zero goals? So, what the taxonomy does is it's a little bit like a dictionary. And it says for a set of what we call economic activities, and that would be: “I manufacture cement” or “I produce energy”, relative to those types of activities, what do I need to do to substantially contribute to one particular objective?
We've talked about decarbonising that's called the carbon mitigation objective. And then we also say, well, it's all well and good if you try and decarbonize, but if you decarbonize, maybe you do so in a way that harms our planet in other places. So, for example, additional pollutants or bad waste management practises, or you're not sensitive to kind of natural capital and biodiversity. So, what we said is yes, it's good to pursue climate change mitigation, so decarbonising, but not at the expense of other things. So that is a concept called do no harm.
So, when I speak about the taxonomy, what we say is it's a dictionary that defines environmental sustainability. To be aligned to a taxonomy, you need to demonstrate substantial contribution to at least one environmental objective and do no harm to any other. But let me know if any of that is not clear and we can drill into it in a little bit more detail.
Xiao Wei: I think that's really a detailed explanation about taxonomy and definitely a lot of governments have been establishing their own taxonomy to achieve their own net zero targets. However, there have been issues regarding taxonomy such as green washing. So how can we actually prevent this kind of issue within the establishment of this and, as in the EU, nuclear and, more controversially, natural gas was considered sustainable investments at one point and critics have claimed that this opens the door to more intense lobbying on definitions in the taxonomy.
Nadia: Yeah, it's a really interesting question and I'm glad you've brought this up as a topic because the taxonomy, when we originally designed it, we hoped would be used both by corporates to report how much of their business activities are aligned. So, the type of reporting is things like how much revenue a company is producing, that's taxonomy aligned. But also, how much investment they're making. So capital expenditure in something that will become taxonomy aligned within let's say a 5-year time frame. Now that was the reporting obligation we wanted for corporates and then for financial actors, we wanted to say, “We want you to demand more taxonomy alignment” and let's go back to basics in terms of how do you actually do that as a policy instrument, because there may not be natural demand.
So, if you could imagine that you have a savings account or eventually you will have a pension pot. At the moment, if you wanted to try and identify a green way of investing, a green current account or saving account or pension, you would actively have to go and try and find those things. What we were saying was, would it change if, for example, your pension provider or your savings provider said to you, “Would you like a green or environmentally sustainable product?” Now if we change the question from you actively having to come to me, to me asking you, would you like it, what you're likely to see is greater demand. More people would go, “Yeah, actually, I'd like a green savings account. I didn't know I could have such a thing. I'd really like one of those.” So, it stimulates demand and then what you say is, “OK, if I'm investing and providing you with the product that I call the green savings account, how do I justify that what I'm doing with your pot of cash that I am managing is in fact green?” Now the taxonomy is one way of reporting.
One of the things just to be really clear on taxonomy is, it covers the hard to abate sector so the heavy emitters, it doesn't cover the whole economy. So, I can invest at the moment, for example, in retail, like fashion, and that's not covered under the climate mitigation objective at the moment for decarbonizing. Now you might have firm views that there are kind of eco-friendly fashion outlets, that circular economy is really important for fashion. That will come as the taxonomy grows. Now you've also asked me a question that was, “but Nadia, there was a little bit of green lobbying, an issue around things like nuclear and natural gas.” And you're right. One of the success points of the taxonomy is in order to signpost what does good look like, we need to cover more and more of the whole economy so that when I invest in nuclear, is nuclear green? When I invest in natural gas, is natural gas green? Now a lot of people have very strong opinions about those items. So, what the taxonomy aimed to do was say, well, what is environmentally sustainable nuclear energy? I mean, it already meets the low carbon threshold, which is less than 100 grams of carbon per kWh that the technical expert group put forward. But one of the really big worries with nuclear are things like: the waste management practises of the nuclear facility or the water use of the nuclear facility, as well as the potential risk of disasters like we saw in Japan. So how can you therefore operate a good or sustainable nuclear facility? And so, what they did was that they wrote criteria saying what is good waste management and water management techniques and licencing provisions that a nuclear facility needs to have. And if you have all those good things, then you could be considered taxonomy aligned. Now, similarly on natural gas there was a real concern and where this came from was, imagine that I am a very coal dependent economy and you're saying to me I need to completely switch to renewable energy sources. That's a very expensive thing to do when I'm also trying to supply my economy with energy, right? I don't wanna have to switch off life support systems cause I've unstable energy supply to my hospitals. I need to worry about energy security. So how do I transition away from coal and the question was “well, is natural gas good enough now?” One of the big problems is if you build a completely new fossil fuel dependent energy source, this is not gonna help you hit your net zero goals. So, when you actually look at the technical screening criterion, what it's saying is to decommission a coal plant and to put in place a gas plant, you need to firstly have considered that you cannot do renewable. We need to see an assessment that renewable is not possible as a facility. Secondly, we expect the average carbon emissions over a 20-year period to be at a very, very low level. Now arguably if you look at the technicality here, you couldn't achieve that on fossil fuel alone. You would need a biofuel mix and biofuels are already in the taxonomy. So, whilst the headline grabbing “nuclear and gas are considered green”, when you actually kind of get into the, what we call technical screening criteria or testing criteria, there's a lot more detail in there that defines what is environmentally sustainable in that space.
There's also in the taxonomy this concept of transition. Unfortunately, and as much as we would all like to go from brown activities to green activities or harmful activities to more environmentally sustainable activities, while we want to make that transition, there's this middle space we need to operate in. We need to continue with energy security but move forward. So, the taxonomy also has bits in it that say we will reward progress and one example of that would be, for example, homes. If we're going to build a brand-new house. That brand new house should be energy efficient. There should be no middle ground. We don't wanna build a less efficient house than we can. But for existing housing stock, particularly when you look at the UK, quite a lot of it is energy inefficient. So, we want to reward the efficiency and what we say is a 30% improvement in energy efficiency is also considered to be taxonomy aligned. And you can continue to make that 30% improvement by ground source heating, solar panels on the roof of your property and other good means. So, we don't wanna discourage people from doing the right thing and transitioning even if a 30% energy efficiency still doesn't make that a “green property”. Does that make sense?
Cass: Yes, it really does. It's really interesting to hear how the taxonomy works within an economy as well as how there's so much emphasis and acknowledgement of the concept of transitions as well, given that it really is a steady process. So, it was really interesting to hear from you on this topic. So, moving from the more technical aspects of how a taxonomy works, we wanted to hear a bit more about your experience working within the taxonomy. So given your global experience, how does your work differ when working on the taxonomy for different regions or countries?
Nadia: Yeah, absolutely. It's kind of an interesting question. They are all ultimately looking to solve the same types of problem, but sometimes in different ways. So, the most developed framework that I work on today is the European regime and I sit as an observer on that platform, and the central task force of this body called the platform, is supporting the development of the tax autonomy. So that means considering new sectors and new testing criteria across all these environmental objectives. So an environmental objective is climate change mitigation (so that's how to decarbonise), climate change adaptation, saying even if Europe does achieve its net zero goals and nowhere else does, there's some adaptation that operators will need to do, and we need to give credit for capital expenditure associated to that adaptation. There's also now an introduction of new environmental objectives. They're not quite live yet, but you will see all the testing criteria and that's for water, circular economy, biodiversity and pollution. So, for all those new environmental objectives, we need to consider, have we got the right sectors? Can everyone who substantially contributes have criteria and understand what good or environmental sustainability looks like to them? So that that is one piece of the platform’s role.
The other piece of the platform’s role is then now we have a taxonomy, and we have mandatory reporting requirements for companies that are financial and non-financial, are we comfortable that everybody knows and understands what they have to do? Can we see any good practises? Can we see any practises that might need support, education, guidance? And also, when we think of the taxonomy as one of the tools in a big policy tool book for the EU, do all those policy tools make sense together? Is it all lined up? Do we all have the data we need to Support us in doing that, so that's the role of the platform. It's a more mature step in the evolution of something called the EU taxonomy. Now if I flip over and I look at the advice, for example, we gave in the UK. The UK has adopted a piece of legislation related to the taxonomy, but no reporting obligations, no policy instruments, and we don't actually have a UK taxonomy yet to look at. So, the advice of the Green Technical Advisory Group, which you can see if you search on the GFI website and I would recommend, if you're really interested, in having a look at that. A lot of those papers are kind of with hindsight; If we were to introduce something a little like the EU taxonomy, what might we do differently, for the UK? What are the things that we've learned looking at the EU taxonomy and how it's been implemented and how would we potentially apply them differently to the UK given that we are very close neighbours and the cost of change or doing things slightly different may outweigh the benefit of doing something slightly different? So those are kind of the discussion papers that we've put out and sent to treasury to have a look through.
Now when we look at Singapore, they are also wanting to review the EU system and then apply taxonomy locally and they're looking at advice as to how they build that out relative to their own pathways to net zero across the sectors and the pieces of the economy that they care most about, and then Australia is very new in their process. So, they're saying, look, we want to have a look at again is the EU taxonomy fit for purpose to be copy and paste it or actually in Australia pieces of the economy that are really important to them would be the mining industry or agriculture. And those are sectors not yet covered by the EU in their taxonomy, so should Australia start to design some more criteria for sectors that it considers important for the way that it can act in a sustainable way? And so that's the type and flavour of advice that technical expert groups will give.
Xiao Wei: Thank you for that. I think it's really cool to see how different countries/regions have their own goals and building their own taxonomy like Australia, looking at EU, whether they can implement that in the country and how the EU is really the most developed taxonomy. I think the difference in the progress of the taxonomy is very interesting to look at, and the fact that it will be also progressed to the same goal, which is achieving net zero. One of the most common criticisms of the taxonomy lies in the divergent definitions in regulations, as firms have found the overlapping requirements hard to adhere to, given that the EU and different countries are starting to set up their own green taxonomies, do you think there's a need for a global taxonomy? For better interoperability, will it be feasible to have one and why?
Nadia: This is such an important question. Thank you so much for asking this one to me because one of the big problems and definitely from my line of sight, is that if each jurisdiction requires different reporting standards and data, then firms will have to report different ways to different consumers. So, for example, if we take the EU and the UK approach and assume both of them have a taxonomy. If I am a UK company and I report under my domestic taxonomy, but I want to attract European investment, do I have to separately report under the EU taxonomy for the EU investor to be able to use that data for their own reporting? Which is not great because then it’s very confusing to me as a UK actor because I've been signalled what environmentally sustainable is from my point of view. But then, in order to attract international capital, I have to service their definition of environmental sustainability and that means that at worst case, lots of companies get bogged down in lots of reporting and data collection, and it's complicated and confusing. And they spend a lot of resource and time and cost trying to resolve the reporting problem and then don't use those resources and cost to fix the ultimate problem of trying to be more climate sensitive in the way that they operate. And so, it is absolutely critical that this is addressed.
There is a central body and they're called the International Platform for Sustainable Finance and what they have done is bring together the Treasury departments across the world so they, at the moment, have 20 members, and that represents just shy of about 60% of global greenhouse gas emissions so it's a pretty substantial group. I think it's maybe just above 50% of global GDP. And what we're saying in that group is, it would be really useful if that group come together with, let's call them, a principal set of guidance. That is, if you are designing a taxonomy, for it to be considered equivalent, these are the standards a taxonomy needs to have. Because we're aware of north of about 40 taxonomies in development across the world. And a taxonomy isn't just something like the EU which is a corporate reporting regime. Sometimes it could be used, for example, like debt labelling. So, where I have a particular project that I'm investing in, that project could be clarified under a taxonomy as a particular type of green or amber for example. And then what we would ideally want is for the roles that I am playing, for example Australia very new to developing their taxonomy, they have a really clear guard rail that says, if you design your taxonomy and it meets these set of principles, then other jurisdictions would consider that equivalent for their own reporting needs. And then my Australian company, when they report under the Australian taxonomy, would satisfy European investor needs. And I think that is a really, really important thing to do to allow interoperability, particularly because capital markets are global, and a lot of these taxonomies are wanting to attract international capital to fix some of their problems. So, it is quite critical that that comes about sooner rather than later, in my personal opinion.
Cass: Thank you so much for the insight. I really found it very interesting. As you mentioned, given the financial markets are so global and the flow of international capital is so crucial. So, given your experience in sustainable finance, as you’ve working on so many different projects for different taxonomies, how do you see the sustainable finance landscape evolve in the next 5 to 10 years?
Nadia: My crystal ball? Yeah, good question. Maybe I'll break it into three key trends that I think will happen and you can come back to me in five years and tell me that I got it all horribly wrong.
The first one I think is a big trend is disclosure, so the way that companies report. Now there's actually quite a large piece of legislation coming down the pipeline. In Europe that's called the Corporate Sustainability Reporting Directive, but then also what we see is a kind of global body that have produced some sustainability reporting standards. And what we're seeing is local jurisdictions and at the moment we're seeing somewhere between 15 and 20 jurisdictions that are planning to adopt these standards. So, they're called ISSB standards and what they are, are climate related reporting very, very similar to the task force on climate related financial disclosure. So, I think what we will see is mandatory obligations on companies to report structured and standardised environmental, social and governance data, which is great news with better data comes better decision making. People, if they want to continue with best in class, can truly see best in class, can start to encourage better performance. And then ultimately tools like the taxonomy can start to evolve, but they're not necessarily the only tool that you can have to see how we stand in terms of corporate behaviour and performance on critical environmental data sets. The second one that I think is going to be, and it's kind of related to this kind of TCFD ISSB reporting requirement, is actually a better appreciation of climate risk. So, climate risk is talked about, and you'll see it in what we call Prudential Regulation. So, this is where you say look, have you risk assessed your business in terms of climate impacts? Now in all honesty, that is a really hard thing to do. A lot of people who work in these companies, including in financial companies, are not experts in how to climate risk assess their business. So, whilst there is an evolution of tools and data available to do it, I think it is still very much an emerging field. People are still trying to understand how do I quantify the physical risk of everything I'm investing in? Where can I see what they call transition risks? So, the likelihood that governments might come in and impose fiscal policy like a big taxation regime on carbon, for example. How would that impact the companies that I'm invested in? Also, what we need to consider is extreme weather events are becoming more frequent and having greater impact and so the ability to price in that risk becomes more important.
What I also see is a big shift, to climate adaptation. Let's imagine even if we were able to decarbonize now at a rate that would hopefully bring us into 1.5 degrees, we see reports out saying we kind of let 1.5ºC move away from us. We're now somewhere between 1.5ºC and 2ºC. That's a really big change. I think I saw, and I might be misquoting this, but like 1.5ºC sees somewhere between 80 - 90% of coral reefs kind of killed off. 2ºC sees 99% of coral reefs killed off. Pretty much has huge impact. So, whilst we say “oh we're slightly missing 1.5ºC, we're going to be closer to 2ºC.” It has a very, very significant impacts into climate adaptation measures. So, for that we need to build resilience into everything so that we're better prepared for a volatile future. So, I think that's a second trend.
And then my third trend, to be honest with you is probably wishful thinking. But I would like to see this one come true, so bear with me while I share this one. And that's I would actually like markets to price, what we call, natural capital or nature properly. So let me play this through with you. So, where I think it is likely to start is in carbon. So, you can, for example, capture carbon in the shape of a tree. So, a tree pulls carbon out of the atmosphere. Similarly, you can capture carbon through the evolution of new carbon capture technologies that are in design at the moment. But wouldn't it be amazing if you said, for everyone who is emitting carbon, they need to be able to offset it in some way, and that offset could include the purchase of land that has the ability to pull carbon out of the atmosphere, i.e. we start to kind of have a balance sheet of carbon emission relative to carbon sequestration, so the removal of carbon from the atmosphere. And if we did that, and if we said that we are emitting way more carbon than, at the moment, our natural habitat has the ability to consume. Then the price of that goes up because you've obviously got a lot of demand saying, well, if I continue to operate my business, I need to kind of pay for it in some way. And then what I hope will happen, and being very simplistic here, would be things like the Amazon rainforest, would carry a lot of value for the Brazilian government because a lot of people would want to protect it. Because it's able to pull out of the atmosphere sufficient carbon to allow them to continue to operate in the way that they would like. So, the ability to properly value nature and what nature offers to operate in an environmentally sustainable way would be lovely and to stimulate market systems to be able to do that I think would be great. It's a long way and I have definitely oversimplified this in the way that I've explained it to you, but it would be incredible if we start to have this value system that values nature and natural capital a little bit better than I think it does today.
Xiao Wei: Thank you for that. I really appreciate the example that you gave about markets pricing their natural capital and I really do hope that your optimistic view about sustainability would come true and I would definitely ask you in the next five years. So based on your experience, what advice would you give students who are looking at entering the sustainable finance industry?
Nadia: Yeah, I kind of really thought about this in terms of advice that I could potentially give, and I would say, that the first point I would make is, regardless of any profession you choose, I would love sustainability to be the heart of what you choose to do. Now I know your question is saying if you're specifically in sustainable finance, but I can certainly see a trend that is, you as the next generation have such power in your hands, in the roles that you take and accept, to try and drive change at your level. And I think quite a lot of us see you as the saviours to the situation that we find ourselves in and campaigning to try and fix. I unfortunately think that the next generation really don't have the luxury of being complacent on climate change in any particular way. And I do think it should be embedded in every sector of the economy and everything that we do, to try and encourage not only personal behaviour but professional behaviour, to really challenge our senior leaders when we are new in an organisation about what they're choosing to do. That would really be my ask of this community if I had one ask. I'm afraid it's not really professional advice on how to enter sustainable finance, but my hope is all finance will eventually tilt to become more sustainable.
Cass: With the effects of climate change being increasingly visible, I think more and more people are starting to realise the sustainability is really increasingly important. So, thank you so much for the advice. Once again, thank you so much, Nadia, for coming on to the podcast and sharing your work with Bloomberg as well as your experience in the sustainable finance industry with us. We really appreciate your time and your sharing. Unfortunately, we have come to the end of this episode, but I hope everyone has learned a bit more about green taxonomies through the podcast. This has been Cass and Xiao Wei from the GreenHouse, and we hope you visit again.