Wednesday 6 October 2021
The emerging world of ESG (Environmental, Social and Governance) is a confusing place. Read this article and take part in our prize draw to win a place on one of our fantastic virtual courses, “ESG Reporting - Why you need to care”. The course is a great way of getting familiar with the brave new world of ESG. That said, not everyone is welcoming ESG with open arms…
Barely a day goes by without new news stories regarding the ESG movement. Take these headlines for example;
"Business can be a force for change on climate". Sounds positive.
"Greenwashing leaves a stain"; "Ex-chair of world’s biggest pension fund sounds caution on ESG". Not so great, these.
And more... "The whistle-blower who calls ESG a deadly distraction", which was further to ... "The ESG investing industry is dangerous". Oh dear. The story here? According to a former star analyst at one of the largest investment houses, ESG directed investing is basically, ‘pointless’. The reason given; namely, if the returns on an ESG directed investment strategy are positive, then it should quite simply be called ‘Investment’ (ESG or otherwise) as the objective should always be to generate a good return, whatever the vehicle. Conversely, if the strategy is not positive then the investment manager is wrongly directing client funds, purely in the pursuit of a goal which is not investor beneficial.
Now, the point of raising this here is not to debate the pros and cons of ESG investing per se, but hopefully to illuminate a couple of points that sometimes require clarity.
First, there’s seemingly much confusion relating to the whole ESG ‘thing’. Full stop. What is it? What’s the importance? Is it, as some commentators have said, ‘just one more ‘fad’ of Wall Street’ and the capital markets?
Second, as attendees on any of our recent ESG Introduction Courses (‘ESG Reporting – Why You Need to Care’) may appreciate, even when we’re discussing ESG with some knowledge confidence there’s a degree of ‘noise’ around the subject, much of which relates to the sheer number of ESG frameworks currently existing for the reporting of CSR type information.
So, to the first point. To understand more about ESG first we must make a clear distinction between the reporting element of the ESG equation (that’s ‘us’) and the other side, notably the ESG Investing part (which is ‘not us’, at least not directly).
But are the two sides linked?
Well, I’d say yes, but we still need to be aware of the fundamental difference between the two. When a company’s (ESG focused) investment decision requires financing, then the capital markets require good quality information to help form their decision on whether to fund that investment. That good quality information provision (as with IFRS / US GAAP before it) comes from ‘us’ and is based upon us the reporters having access to (as far as possible) one high quality body of standards. We report on the results of the company’s investment decision, which was financed by the capital markets, that relied upon good quality information to assist in the decision making.
It’s a circle, isn’t it? Capital markets need information to direct the flow of finance and to evaluate the results of the financing. If that’s so, then surely whether an ESG Investment strategy is ‘Pointless’, to coin the phrase, is not really our (‘us’) main concern. Our concern, as always, is to provide the quality information to those who need it. Information to report on ‘what has happened’, no matter the incentive for the initial decision. In short, ESG Reporting is not the same as ESG Investing. For us reporters, yes, we might disagree on the benefits, or costs, of these new reporting requirements, whilst agreeing that ESG Reporting is no ‘fad’. It’s here to stay. It has its point.
So, about the second concern. Where are we on this ESG Reporting journey? You won’t find too many headlines yet, positive or otherwise, about the role we’re playing. That doesn’t mean a lack of progress though. There are moves afoot. Take for instance that array of frameworks, mentioned earlier, developed over years for different forms of voluntary sustainability reporting. Surely they won’t all survive the long and demanding process of ‘standardisation’. Which one of the many will prove to be the weakest link? That’s not a question troubling any of the Group of Five (as they are known) main framework developers, who as a single body have published the first prototype climate related financial disclosure standard. Nor would it appear to be the Task Force on Climate Related Financial Disclosures. Whilst not part of ‘The Five’ the TFCD is in the chase for continuing recognition. It is after all their recommendations that underpin the prototype standard.
And then of course there’s the IASB.
As we begin the countdown to COP 26, increasingly it appears ‘a given’ the IASB will decide in favour of a new constitution for a proposed new board, dedicated to developing ESG Reporting Standards. That’s big news. If the decision to proceed with an ISSB does come to pass – and there’s no reason for thinking otherwise, then the IASB in its ISSB guise will be the mastermind for shaping the continuing ESG journey, however long it takes.
Now, about that prize draw: Simply head down to the bottom of this page and you’ll see a little quiz. The prize? The first name drawn, at random, from the proverbial hat will win an invitation to attend one of our ‘ESG Reporting – Why You Need to Care’ virtual courses, worth £249.
As always, terms and conditions apply. Full terms and conditions can be found here but the key points are as follows:
- Closing date for entries is 11:59pm 31st October, 2021.
- Draw will take place on or before Nov 3rd and winner notified within 14 days following the draw.
- Only one entry per person.
- Correct answers are not required to be entered into the draw.
Prize Draw: What's in a Name?