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COMMENT BEYOND20


Expandingthe EinESG


CORPORATES LACK CLEAR GUIDANCE WHEN IT COMES TO ENVIRONMENTAL DATA


aligned. Improved standardisation is critical to enabling informed decision-making by finan- cial market players. This requires urgent advancements across nature-related disclo- sures in particular.


DAVID CRAIG


mental, social and corporate governance (ESG) financing finally went mainstream — when social inequalitieswere put under the spotlight by the pandemic and the movement for racial justice ignited following the death of George Floyd. The climate crisis continued to escalate, and demand for responsible investment rose sharply, as investors woke up to the potential for ESG factors to affect the valuation and financial performance of the companies they invest in. Sustainability has become the new aspiration. Now, robust measurement and dis- closure are fundamental to achieving it. Investors plunged nearly four times the


W


amount of money into ESG funds in 2020 as they did in 2019, according to the Investment Association. New research released earlier this month by the Global Sustainable Investment Alliance finds that sustainable investments make up 36% of all assets in five of the world’s biggestmarkets. The challenge nowis to ensure the myriad ESG funds actually deliver on the sustainable investments their labels promise. With the rapid growth of sustainable finance offerings, we have seen a widening range of cri- teria used to define what is sustainable or ESG-


48


hile 2020 will go down in history as net negative, it had at least one major positive: it was the moment environ-


Focusingonthewrongareas As executives and board members across cor- porations have witnessed rising investor demand for sustainable products, they have increasingly looked to comply with ESG prin- ciples — and provide the disclosures to prove it. But when doing so, corporates and finan- cial institutions have tended to focus more on the ‘G’, while deprioritising the ‘E’ and the ‘S’. This skewed focus on governance disclosure does not imply that business and finance sec- tor players fail to see environmental and social factors as meaningful for financial per- formance; instead, environmental and social issues are notoriously much more difficult to measure than governance factors, such as executive pay, board independence and dis- closure practices. My experience as the chief executive of


Refinitiv, a global provider of financial data and infrastructure, is that corporates lack clear guidancewhen it comes to environmental data in particular. This aligns with a recent study by S&P Global that identified that businesses found the ‘E’ in ESG to be the most difficult to assess and incorporate into credit risk analysis. Various studies suggest the considerable differ- ences in environmental disclosure practices, driven by a lack of reporting standards, are the main obstacles to the widespread use of envi- ronmental data. Standardisation is essential to enable comparability on a given metric across organisations, which is critical for the data to be integrated systematically in financial deci- sion-making. When done right, the ‘E’ should take into


account the financial risks associated with a company’s dependence on natural resources, as well as the effect of its operations on the envi- ronment, both in its direct operations and across its supply chains. Both represent tangi- ble short- and long-term financial risks and opportunities for investors.


Understanding the situation Over the past few years, investor and corporate awareness of environmental issues has grown


www.fDiIntelligence.com August/September 2021


Artwork by SamKerr


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