There are confusions, there are uncertainties but ESG is the new reality. It would be great if the industry finds standardisation that takes into consideration all angles and viewpoints before making things mandatory.This summer, ESG has definitely been the recent hot debate in fund management circles and in general the financial realm. The upcoming regulations being the reason of course. There is a debate on what it should be, how much it should regulate, on implementation and questions have been raised on whether this will be another regulatory drag. There is optimism mixed with some confusion.
The UNPRI, a leading proponent of responsible investment says that governments of 38 of the largest 50 economies in the world either already have, or are developing, disclosure requirements for corporations covering environmental, social and governance issues. Also, countries with pension fund regulation and stewardship codes are fast increasing. So, for many, ESG is already a reality.
However, there are still challenges to be met and corners that need ironing. For instance, what exactly will be covered under the ESG umbrella? Another key challenge is trying to measure ESG in different industries as the nature of businesses varies. Putting different kinds of companies on the same line and considering various environmental, social and governance aspects is not an easy task. Then, different governments have different policies that make global comparisons.
So, what will ESG cover anyway?
This spring, the European Commission launched an EU wide taxonomy project that aims, for the first time, to define the terminology and its scope. However, for now, the definitions, rules and guidelines vary from country to country, which makes comparing ESG responsibilities of companies in different parts of the world challenging.
For instance, when the EU regulations come, will they match the goals of China’s Green Task Force? Then there is also the case of who interprets ESG how. It is crucial that regulations, when they come into play, cover not only the current pain points but also cover the areas that would need attention in the future.
Will the regulation help or hinder?
Recently, Moody’s said that ESG reporting rules under the ‘EU Action Plan on Sustainable Finance’ were “credit-negative” for asset management firms due to operational costs. Many in the industry are now questioning if ESG will become another regulatory drag.
A UNPRI report found that “investors are sceptical of the effectiveness of policy because of weaknesses in policy design and monitoring and inconsistency between different government departments and regulators.” In the same report, pension fund associations had warned the European Commission not to take a “prescriptive approach to the consideration of ESG factors by institutional investors.”
However, some industry voices also feel that ESG strategy demand is now coming from the clients and therefore it is becoming increasingly necessary to have some sort of standardisation. So, there is clearly a need to put in place more robust structures and regulations to protect investors who are interested in increasing their exposure to ESG products, as well as to guide asset managers to handle products better.
After all, the EU regulations aim to ensure that “asset managers, institutional investors, insurance distributors and investment advisors include economic, social and governance (ESG) factors in their investment decisions and advisory processes”.
We at Evli believe that ESG is the new normal and its success comes down to transparency. It is necessary that all the voices in the room get heard around this conversation. It will also be great if regulative measures are taken to make it more attractive to invest in sustainability. Of course, maintaining integrity whilst facilitating growth will be key. Hopefully, the industry will be able to make responsible investment regulation not only the new global standard, but the implementation will be impactful, and for the greater good.
