Investors aren’t as simple-minded as they once were. Nowadays, they want to know that their investments are going to companies that not only turn profits, but also conduct their business activities responsibly. They want to invest in companies that are committed to ESG (environmental, social, and governance) issues.
Some surveys suggest 48 percent of investors are interested in sustainable investing. Others suggest that 85 percent are ESG-conscious with their money. What is certain, though, is that such investing is growing. When in doubt, follow the money.
Global ESG funds saw a record $649 billion in investments through Nov. 30, 2021. That’s up from $542 billion in 2020 and $285 billion in 2019.
There is a high demand for ESG investing and information regarding companies’ environmental, financial and social performance.
“This has been a massive trend for us,” says Joanna Appleton, VP head of content strategy at Dow Jones, adding, “people and companies have been looking extensively at new products to assess the value of their portfolios and look at the sustainability of their investments.”
Dow Jones is the American firm that publishes such financial journals as the Wall Street Journal, MarketWatch and Financial News. The firm also launched its own sustainability data earlier this year to help the global financial community understand the performance and impact of a company’s ESG practices.
The influx of ESG financial products is putting more pressure on companies and portfolio managers to provide investment products that can meet investors' evolving demands.
With companies eager to showcase their products or funds as sustainable, there is a massive flock of ESG information being released. That’s great, but there are no reporting standards or industry alignment. It’s difficult to compare investment options without ESG reporting standards.
How can investors make sense of or trust the information that they’re given?
This has been one of the biggest challenges for investors and asset managers. Companies are given ESG ratings by third-party reviewers, but there is no congruence with the different ranking providers.
“When the asset managers are looking through those scores, they’re having to spend a lot of time to work out how it was calculated," Appleton explains. "They almost have to reverse engineer it to really understand it so there’s not a huge amount of trust in some of the opaque methodologies."
Transparency is needed across all markets to facilitate sustainable investing, prevent greenwashing and incentivize companies to enact more sustainable business practices.
Reporting standards vary across jurisdictions. In the United States, there are no mandatory ESG reporting laws. However, the U.S. Securities and Exchange Commission (SEC) currently requires publicly listed companies to provide investors with any information that may be material to them, and that includes ESG risks.
The SEC has also proposed to make environmental reporting mandatory, as well as to provide legal structure on how wealth management professionals market their ESG investment products. The wheels are in motion to bring ESG standardization to some aspects of the U.S. corporate world, but nothing is legally binding yet.
In Europe, the Non-Financial Reporting Directive (NFRD) obliges large public-interest companies (as in those with more than 500 employees) to publish information related to environmental and social matters.
The directive is soon to be expanded as the Corporate Sustainability Reporting Directive (CSRD) has been approved and is awaiting implementation. This new directive will require more detailed reporting on ESG matters from an expanded pool of companies.
Europe also enforces the Sustainable Finance Disclosure Regulation (SFDR) which requires investment firms and portfolio managers to disclose ESG information to their clients.
At last year’s climate change conference (COP26) in Glasgow, Scotland, the International Sustainability Standards Board (ISSB) was established to develop a global framework for ESG reporting.
The ISSB put forth its proposals earlier this year and invited feedback and recommendations on the initial framework.
A statement issued and signed by more than 80 chief financial officers (CFOs) showed support for the initial framework but also encouraged revisions. Much of the feedback focused on ensuring clear definitions and guidelines that are in close alignment with already existing frameworks like the SASB standards.
The new ISSB standards are expected to be released later this year. There won’t be anything legally binding about the framework yet, but it will at least create a global standard to make ESG reporting much more transparent and easier to understand for consumers and investors.
Standardized reporting is a crucial step to take as more and more money flows into the sustainable investing market.
Image credit: Gerd Altmann via Pixabay
Andrew Kaminsky is a freelance writer with no fixed location. He travels all corners of the globe learning about the different groups that call this planet home, seeing natural wonders, and sharing laughs with the people he finds along the way. An alum of the University of Winnipeg's International Development program, Andrew is particularly interested in international relations and sustainable development. In his spare time you are likely to find Andrew engaging in anything sport-related, or finding common ground with new friends over a craft beer.