The investment world is changing colour as it takes chameleon-like steps towards a greener future. Environmental, social and governance (ESG) performance is a growing consideration – but determining just how green each investment is can be a bewildering process.
ESG criteria for assessing non-financial performance embrace a diversity of elements which can be difficult to quantify, meaning that reaching an accurate measurement or assessment is far from simple.
The Financial Stability Board created the Task Force on Climate-related Disclosures in 2015 to attempt to develop a set of consistent financial risk disclosures for use by companies, banks, and investors.
Meanwhile, the Sustainability Accounting Standards Board was set up in 2011 to develop a global set of sustainability accounting standards.
Challenges remain, however, in ensuring the data collected is relevant, material, and comparable for quantifying a company’s ESG position, and investors must sometimes navigate a vast array of ESG information in weighing up their options.
Numerous ESG ratings systems have emerged over the years in an attempt to distinguish between consistent sustainability performers and companies that greenwash their image with suspect ESG credentials.
By studying annual financial and non-financial reports, investment analytics, management data, and relevant media coverage, investors can produce numeric scores to judge companies’ sustainability performance and exposure to ESG risks.
The dangers of deceptive data
However, as not all ESG ratings have the same set of focuses due to disparate contexts, metrics, and methodologies, they may at times be considered subjective, incomparable, or even misleading.
This can lead to discrepancies where companies that score highly with one rating agency receive a lower score from another. The focus of some agencies may even lead to investment decisions that favour companies involved in greenwashing.
To tackle these discrepancies, investors are increasingly relying on their own proprietary ratings and vetting systems to assess and analyse the raw ESG data they collect from companies across their extensive portfolios.
In cases where ESG ratings are used, investors will also need to thoroughly understand the methodologies and process of data collection used by rating agencies.
To cut through the noise, sustainable finance taxonomies are being established globally. Europe, for instance, has introduced tougher regulations to provide investors with clear guidance on how to assess companies against new sustainability disclosure guidelines, ESG product definitions, and ESG fund requirements.
In Asia, finance ministers and central bank governors from members of the Association of Southeast Asian Nations (ASEAN) have announced their support for an ASEAN Taxonomy for Sustainable Finance (ASEAN Taxonomy).
This will serve as ASEAN’s common language for sustainable finance and account for both international goals and ASEAN’s specific needs, and its development progress is expected to be updated by the end of 2021.
In China, meanwhile, the People’s Bank of China, the National Development and Reform Commission, and the China Securities Regulatory Commission recently launched China’s updated Green Bond Endorsed Project Catalogue.
This initiative aims to direct domestic green bonds towards green and low-carbon development strategies, based on China’s Green Industry Guiding Catalogue which defines green industries and has a focus on pollution prevention and control.