The International Capital Market Association (ICMA) has proposed high-level definitions of commonly used sustainable finance-related terms, suggesting that some of these were inappropriately treated as synonyms, potentially to detrimental effect.
The definitions have been published by ICMA’s sustainable finance committee, which was set up in September and brings together various ICMA committees, including its buy-side arm, corporate issuer forum, and the executive committee behind ICMA’s voluntary market guidelines for labelled green and social bonds.
In a publication, it said there was “a need for convergence on terminology among market participants, wider stakeholders, as well as policy makers and regulators”.
“Specifically,” it continued, “the use of ‘climate’, ‘green’ and ‘sustainable’ as if they were interchangeable terms may dilute the urgency of making progress in climate mitigation and sustainable growth policy goals as outlined notably in the Paris Agreement or in the United Nations Sustainable Development Goals.”
Separately, ICMA emphasised that its proposed definition of social finance incorporated funding health and healthcare projects and those related to COVID-19.
According to ICMA, the objective behind its proposing definitions was to “clarify the debate and to ensure that all participants and stakeholders have a common and transparency vocabulary to refer to”.
Nicholas Pfaff, head of sustainable finance at ICMA, told IPE that the association’s ambition was not “that the whole market align with our definitions”.
“The idea is to clarify what we are talking about in the green, social and sustainability bond markets and also to have an impact on the terminology in use in the (largely EU) policy debate,” he said.
Climate, green, impact, sustainable finance
In providing its definitions, ICMA has distinguished between terms such as climate finance, climate transition, green finance, impact finance, responsible or ESG investing, and sustainable finance.
It provided a diagram to illustrate the interaction between key high-level definitions and how the wider definitions incorporate narrower ones.
The diagram also aims to show key differentiating themes between the definitions, such as “economic and financial stability” in the case of sustainable finance.
In a grid, ICMA also set out how its definitions compared with those provided by UN, EU, G20 and Chinese sources.
With regard to climate finance, for example, it explained that its definition was based on market usage and “refers also the language under the Paris agreement as well as the UN definition by adding further emphasis on the applicability of climate finance to both projects and assets”.
ICMA’s intervention is the latest in a series of voluntary efforts – paralleling greater regulatory scrutiny – to achieve a common language or understanding with regard to terms such as ESG or sustainable finance.
The definitions can be found here.