Frequently asked questions on ustainable finance
The EU Taxonomy regulation is a classification system for corporate sustainable activities. It is seen as a huge lever for implementing the European Green Deal as it increases the attractivity of sustainable business models for the financial market.
The EU Taxonomy is legally binding. Financial institutions are obliged to disclose the extent to which the activities of companies they finance are environmentally sustainable. Companies currently covered by the Non-Financial Disclosure Directive (NFRD) must, on the other hand, report the share of taxonomy alignment. In the future, the NFRD will be replaced by the Corporate Sustainability Reporting Directive (CSRD), which is why the scope of the EU Taxonomy will be extended.
The difference between sustainable finance and green finance lies in the focus. Sustainable finance refers to all sustainability topics. Green finance, on the other hand, focuses on environmental issues such as carbon emissions, biodiversity or the prevention of water pollution.
Sustainable finance covers many topics, which are linked to sustainable development, as well as levers and actors in the financial market. Therefore, it includes measures for sustainable development from a financial perspective. ESG is a part of the sustainable finance topics. An ESG rating provides information on how well a company performs in the areas of environmental, social and governance.
Why would I put the evaluation of my specific sustainability performance in the hands of a generic rating provider?
First, in order to increase visibility: especially for bonds, access to long-term oriented capital providers can be increased by appearing in the rating institution’s catalog, and even more so with a prime rating. Second, an external independent quality seal covering all of the branch’s ESG aspects underpins one’s claim to sustainability. Third, good ratings are also acknowledged by banks. There still is a certain subjective factor involved in ESG performance assessment, and good ratings can help to use the confirmation bias to one’s own advantage.
With the rating framework, I get an up-to-date, neutral external definition of “best in class” to benchmark against, with direct or indirect competitors across the branch, globally. This serves as a tool for sustainability strategy evaluation and gives an efficient overview of strengths and weaknesses.
Keeping track of the different rating institutions, their target groups, their methodological specifics, and their information needs for favorable results is not a trivial matter. denkstatt’s experience helps you to get a quick overview, choose a rating provider that fulfills your needs, and organize the rating process efficiently. In addition, we guide you in making the most use of the assessment report for advancing your sustainability strategy in the long run.
Many rating providers base their assessment on publicly disclosed information. If that is not available or not well-structured, and if the company does not cooperate, the result is worse than it needs to be. ESG ratings do not exclusively conduct a sustainability performance evaluation, but mostly a sustainability management and transparency evaluation. So especially when there is a low level of transparency or a lack of structured approaches, the rating result is bad, even though behind the scenes progress in sustainability may have been made.