Movements towards measurement, reporting and transparency are making it easier for investors to assess environmental, social and governance factors.
For many investors, sustainable investing became a priority in 2020 – a theme that is likely to continue for years to come. Yet even as we talk about reducing our carbon footprints, improving employee welfare in supply chains and holding companies with poor governance to account, there is still no single global framework for measuring and evaluating environmental, social and governance (ESG) factors. So how do we ensure that our investments are truly sustainable?
There is good news: as it is becoming clear that transparency, accountability and comparability must be at the heart of sustainable investing, governments, regulators and private corporations across the globe are getting on board.
Corporates are opening up
In terms of corporate reporting, transparency is improving in a variety of sectors, with firms providing more thorough disclosures and details around their long-term ESG strategies. Under increased scrutiny, particularly from shareholder activists and ESG rating companies, corporate sustainability reports are becoming the norm during investor-facing communications and annual financial results announcements, and companies are increasingly realising they will be the odd one out if they do not outline their paths to net zero. Some stock exchanges even make ESG reporting a requirement for listing. We also see a growing willingness to proactively improve ESG credentials in response to engagement efforts.
Much of this is driven by investors themselves, as they become increasingly sophisticated and aware of the potential financial materiality of ESG risks and opportunities.
Standards are getting stricter
We believe regulators will also play a key role in driving transparency and improving reporting standards – which in turn will facilitate comparability – and we continue to see progress towards more stringent disclosure requirements.
For example, the Task Force on Climate-related Financial Disclosures (TCFD) has been instrumental in pushing for better climate-related reporting. Stricter reporting standards for EU-based asset managers have now been introduced under the Sustainable Finance Disclosure Regulation (SFDR) framework, which will require financial firms to be more transparent on the ESG credentials of their proposed investment solutions. The EU has established its own taxonomy comprising six environmental objectives – ranging from climate change mitigation to the protection of healthy ecosystems – in order to fight greenwashing.
These are just some of the widely adopted reporting frameworks. There are many others already in place, including those from the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative’s standards, and the UN’s Principles for Responsible Investment, to name but a few.
Emerging means of measurement
Increased regulation and investor demand for greater transparency has also led to a proliferation of firms offering ESG data, research and ratings. These provide a variety of data points and insights to help investors compare and evaluate their investment choices.
Just a few of the key players in this field include MSCI ESG Ratings, a market leader in measuring companies’ resilience to material ESG risks that provides, among others, ESG controversies screening, business involvement screening, impact measurement frameworks and carbon metrics; Sustainalytics, which focuses on sustainability metrics as well as ESG corporate governance research and ratings; Vigeo Eiris, which evaluates ESG integration in companies’ strategies and provides green bond certification; CICERO, which assesses the environmental robustness of green bonds; and leading climate and carbon metrics provider Trucost, part of S&P Global.
Impact investing has been attempting to harmonise its impact reporting by using the 17 UN Sustainable Development Goals as an impact framework. The 17 SDGs have 169 targets and 232 indicators against which to track progress.
More to come
All these developments make us optimistic that we are moving in the right direction, with data availability and transparency only likely to improve from here. However, we are still a long way from one unified approach. Fragmentation will remain a concern given the range of reporting frameworks, with each data provider or ratings firm using its own methodology.
As we don’t yet have consistent and comparable criteria on which to base assessments, and given the difficulty in quantifying qualitative metrics, a degree of judgement is still needed when evaluating ESG factors and the genuine impact sustainable investments may have in the real world.
To find out more, contact us or your Relationship Manager.