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AFME: ‘Financial materiality is not sustainable finance’s end goal’

AFME: ‘Financial materiality is not sustainable finance’s end goal’

In conversation with Richard Peers for Finextra TV, Tonia Plakhotniuk, associate director, policy (sustainable finance & financial reporting) at the Association for Financial Markets in Europe (AFME) traverses a number of predications we can expect to see around sustainable finance in 2021.

Off the back of a joint report by AFME, Boston Consulting Group, GFMA, among others, Plakhotniuk says that there is roughly $150 trillion in investment needed over the next three decades in order to transition to a low-carbon economy.

“This [$150 trillion] is purely the investment needed for climate finance and not the entire sustainability spectrum so a lot needs to be done. That said, everyone is hoping 2021 will be a year of true action when it comes to the world of sustainability.”

Drawing attention to one specific pain point of sustainable finance, Plakhotniuk notes that we’ve seen a vast number of ESG related regulations and initiatives in recent years. She explains that there remains a real need to consolidate these frameworks in order to help streamline reporting and disclosure processes related to ESG.

“This will ensure investors can obtain the information they need, and critically, will also ensure that those who prepare the information can produce information that investors are actually interested in.”

Plakhotniuk notes that last year we saw the five key standard setting bodies signed up to work together for the purpose of a more holistic corporate reporting framework. She expects that following the merging of two of these bodies, the Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC), we will see more of this behaviour during 2021.

This trend has already been seen by the International Financial Reporting Standards Foundation’s (IFRS) recent consultation on the need to create a global sustainability reporting standard under the governance of a new sustainability standards board and alongside the existing standards board.

“Seeing this credible, global, standards-setter want to contribute to the consolidation effort is an important move in our opinion. It shows interest in bringing together a harmonised, useful framework for everyone to use.”

However, for this to happen successfully, Plakhotniuk argues that it would need to build on the existing framework rather than formulating another separate standard.

There has also been debate around whether climate reporting should take precedence or if a broader spectrum of sustainability-related issues as a potential standard comments Plakhotniuk. “We hope and think that although climate-first might be an initial approach given the urgency of this issue, but it’s important to set the tone at the very outset and broaden the scope of the potential standard into other sustainability matters.”

Financial materiality is naturally another concern which Plakhotniuk notes is prompting strong debate in the area, with stakeholders interested in the impact of externalities on the financial performance of a given company. There are also stakeholders who think that any potential global standard should also ensure that companies should also report on what impact their business activity has on environmental and social wellbeing.

“Our view is that we can start from financial materiality, but ultimately this is not the end goal. There should be a broader remit and companies would need to report on how their activity is impacting on societies and environments, especially given the fact that ‘non-financial’ standards is now very much link to financial.”

In agreement with Peers, Plakhotniuk concludes that the combination of standards across financial and non-financial to deliver the outcome many are looking for, is expected to be supported by the consolidation and cooperation of the leading industry bodies mentioned earlier.

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