One of the cornerstones of the newly emerged European Taxonomy, and the more recent SFDR (Sustainable Finance Disclosure Regulation) is that of the principle of doing no significant harm. In this new context of sustainable finance of the European Union, investments are required to demonstrate that they do no significant harm, but what does this mean exactly?
As many financial actors and investors are starting to realize, such a concept can be rather complex or ambiguous to understand, as these latter regulations seem to refer to the principle with different nuances. This is why today we wanted to dig a little deeper into this principle in order to understand what it implies and why it is so important.
The sustainability path of the EU
The European Taxonomy has not been around for long, but its importance is increasingly stronger and obvious. And it is in the six main sustainability objectives laid out in the document that we first encounter the principle of doing no significant harm; the new regulation states that companies should demonstrate their alignment with the Taxonomy and their contribution to at least one of the six environmental objectives without harming any of the others. The taxonomy itself provides metrics to help demonstrate that DNSH is met.
But even then, information can be limited and complex to understand for investors; this is why in March 2021 the SFDR (Sustainable Finance Disclosure Regulation) came into place, to provide exactly what the name suggests, disclosure. In this context and following these new regulations, investors will find it easier to understand and compare in order to make the most informed decisions. Additionally, the regulation helps classify financial products, gives metrics for a thorough evaluation and uses ESG criteria to measure social, environmental and governance-related impacts.
Why do no significant harm?
The principle was born on the premise of avoiding a myopic understanding and subsequent practices in financial and investment processes, which, if the principle was not at hand, would tend to focus on one given environmental or social factor and give little to no consideration to other parameters. It is in this context that fears appeared on the lack of progress towards any other objective but the decarbonization process and the net-zero by 2050 target.
As important as the decarbonization journey is, sustainable or green investment funds were beginning to focus solely on the carbon emitted by a company at the expense of other similarly important targets or metrics regarding the protection of the environment or societal well-being, for example. And so the DNSH principle was born to ensure companies and investors met a minimum baseline standard regarding their good practices.
In short, the principle is born and further explored on the SFDR to ensure investors are mindful and aligned with a holistic approach to sustainability. It is therefore important that they have the necessary tools, information and regulatory framework through which to approach a market that’s increasingly pushing for sustainability efforts to become the norm. Furthermore, it is also a means to avoid and fight greenwashing, which is also a core reason for the drafting of the EU Taxonomy in the first place.
Transparency as a tool to advance the planet’s objectives
We believe and work for transparency to be one of the key values driving the fight for climate action, social wellbeing and effective governance, as it is the only way to understand what we are doing wrong, what we are doing right and what it is that we are not doing yet.
Because being transparent is not only an externality to a company, or a given organization, to help build trust and reputation; it is in fact also a great learning and improvement mechanism. You cannot manage what you don’t understand. And so we advocate for transparency, integrity and precision as imperatives to the fight against climate change.
In DoGood we are convinced of the need to understand and manage efforts to achieve a sustainable transition inside an organization for the correct and efficient functioning of the business and the community it operates in. We alone cannot achieve the substantial changes necessary, but we work on the basis of collaboration, transparency and accuracy in order to bring light to sustainable actions.
In this regard, it is essential to our work to promote good corporate governance, meaning that the processes of disclosure and transparency are followed so as to provide regulators and shareholders as well as the general public with precise and accurate information about the financial, operational and other aspects of the company, including a more accurate definition of the ESG performance.
We have developed a corporate government tool that helps establish ESG impact objectives for employees in regards to the sustainability strategy of the company. Through our technology we are able to activate and track employees’ impact, creating engagement that translates into improved ESG metrics, reputational value and an overall positive impact for the environment and society.
If you want to know more about how we work to create a positive social and environmental impact, click here.