“Regenerative Finance (ReFi) is the term used to describe the concept that integrates Financial Practices with Social Responsibility, Sustainability and Regeneration. ReFi aims to create economic systems that go beyond generating financial returns to focus on restoring and enhancing Social, Environmental and Economic well-being.” – https://cointelegraph.com/learn/what-is-regenerative-finance-refi
A regenerative economy is ‘the application of nature’s laws and patterns of systemic health,
self-organization, self-renewal, and regenerative vitality to socioeconomic systems’. In a regenerative economy, businesses create value beyond only the financial: human and environmental ROI are equally important to financial returns, while profit is a means to an end—the end being (and overall imperative of the business) positive societal outcomes. – https://respond-accelerator.com/wp-content/uploads/2022/11/Final-Report_REGEconomies_NOV2022.pdf
Now that we understand Regenerative Finance and Regenerative Economy, we need to look at what all it entails. At the very beginning normal finance will look at short term gains / profits and is focused on satisfying the Shareholders. ReFi on the other hand is focused on long-term benefits and looking after all the stakeholders.
ReFi looks at a holistic approach to financial systems focusing on the ESG issues. The ISSB (The International Sustainability Standards Board) has issued the S1 and S2 standards relating to sustainability related disclosures in capital markets globally. This is aimed to bring in trust and confidence in organization disclosures about sustainability enabling sustainable investment decisions.
IFRS S1 is about disclosure requirements to enable organizations to disclose to investors about the sustainability related risks and opportunities they face over short, medium and long term. IFRS S2 is for disclosing climate related disclosures and is to be disclosed along with S1.
IFRS S1 asks for the disclosure of material information about sustainability-related risks and opportunities with the financial statements, to meet investor information needs. The key features of IFRS S1 are:
- It applies the Task Force on Climate-related Financial Disclosures (TCFD) architecture (governance, strategy, risk management and metrics and targets) for disclosure of information about sustainability-related risks and opportunities
- It requires industry-specific disclosures
- It refers to sources to help companies identify sustainability-related risks and opportunities and information
- It can be used in conjunction with any accounting requirements (GAAP).
IFRS S2 sets out the requirements for a company to disclose information about its climate-related risks and opportunities.
- It incorporates the TCFD recommendations
- It is used in accordance with IFRS S1
- It requires disclosure of material information about climate-related risks and opportunities, including physical and transition risks.
- It requires industry-specific disclosures, which are supported by accompanying guidance built on the Sustainability Accounting Standards Board (SASB) Standards.
Dr Nigel Sleigh-Johnson, ICAEW Director for Audit and Corporate Reporting told IAB: “There is a significant need for upskilling across the corporate reporting ecosystem, including the accounting profession, which we think can and should play a major role in contributing to the coming step change in transparency around sustainability.”
Garraway commented – “Accountants can no longer treat sustainability as a separate reporting domain but must interweave it with financial reporting; this integration of sustainability will make an accountant’s role more strategic in assessing and communicating performance across financial and non-financial metrics.”
We also see new Assurances coming up and one such is the Sustainability Assurance 5000, General Requirements for Sustainability Assurance Commitments from IAASB (International Auditing and Assurance Standards Board). Currently it is in a draft stage.
The ISSA 5000 builds on existing standards, including the International Standard on Assurance Engagements (ISAE) 3000 (Revised) and ISAE 3410, by extension also building on the Non-Authoritative Guidance on Applying ISAE 3000. Therefore, in addition to the ISSA 5000, IAASB also published Proposed Conforming Amendments and Consequential Amendments to Other IAASB Standards, and an Explanatory Memorandum. – https://www.natlawreview.com/article/iaasb-launches-consultation-issa-5000-proposed-global-sustainability-assurance
The topics covered are:
- Climate, including emissions.
- Energy, such as type of energy and consumption.
- Water and effluents, such as water consumption and water discharge
- Biodiversity, such as impacts on biodiversity or habitats protected and restored.
- Labour practices, such as diversity and equal opportunity, training and education, and occupational health and safety.
- Human rights and community relations, such as local community engagement, impact assessments and development programs.
- Customer health and safety.
- Economic impacts, such as government assistance, tax strategy, anti-competitive behaviour, anti-corruption and market presence.
We can now see how there is a big shift in the way we are used to focusing on finance and audit.
In ReFi we need to find opportunities for Impact Investing and allocating funds to initiatives that support sustainable outcomes like Sustainable Farming, Renewable Energy, Biodiversity and Ecological Restoration, etc.. In Bharat, SEBI has mandated that 65% of the funds to be allocated for Sustainable Projects and Sustainable Organization. ReFi also focuses on Circular Economy and well-being of the community.
New technology like Blockchain is important in ReFi. For example, in a Decentralized Green Bond are issued on Blockchain Platforms and thus eliminate the need for an underwriter as all are managed using Blockchain technology through Smart Contracts. These Bonds are tokenized using Blockchain thus providing digital ownership. Carbon Credit Sale and Purchase can be another good example.
These Green Bonds are used to generate funds which will then be used in Sustainable Projects that benefit the environment and circular economy. These projects need to be monitored to ensure that the project objectives are being met. The ecosystem of stakeholders like investors and project beneficiaries can form Decentralized Autonomous Organization (DAO) structure and be part of decision-making process for the project.
Circular Finance is another aspect of ReFi. Here, circular supply chain is promoted supported by circular finance models. Companies with circular supply chains make durable, simple-to-repair and recyclable items. These companies receive financial support from circular finance initiatives in their efforts to embrace more sustainable practices.
Web3 will play a significant role in ReFi. Platforms can be created for Crowdfunding Regenerative Initiatives like initiatives on Green Technologies, Regenerative Agriculture, Renewable Energy, products having Circularity, etc..
Using Blockchain we can have the traceability of both upstream and downstream carbon footprint and other sustainability information. Thus it makes the ecosystem more accountable for environmental and social effects.
Another good use case is that it helps in community driven decentralized governance. Community influences the allocation of funds and development projects for ReFi through use of Web3.
Thus, we can see that there is a significant shift that needs to be brought in for the practitioners of Finance and Audit. There is a serious skill gap and needs to be addressed immediately, else it will fall short.
To learn more, @Xellentro we have a 4 hrs workshop on Sustainability for Finance Practices.
Author: Dr. Niladri Choudhuri