The rise of ESG principles presents a new challenge for financial firms. With many businesses wanting to get on board with ESG, inconsistent reporting and guidelines add an extra hurdle to the process.
Last month, Reuters Events held a webinar that focused on ESG corporate reporting. Six panelists gave their thoughts on the lack of ESG standards and their effects. The panelists included:
Subramanian (Subi) Kuppuswami, Global Head of Sustainable Banking & Investments at Tata Consultancy Services
Sandra Schoonhoven, Head of Sustainability at ING
Anne Simpson, Managing Investment Director, Board of Governance & Sustainability at CalPERS
Michael van der Meer, Head of Sustainable Investment Specialists at Credit Suisse
Michael Kashani, Head of ESG Credit at Apollo Global Management
Krithi Krithivasan, President, Banking Financial Services, and Insurance at Tata Consultancy Services
The Rise in ESG Awareness
In the past two years, interest in ESG has grown exponentially. For this reason, financial institutions around the globe are responding to stakeholders’ demands for ESG investing. It’s far from simple though. Businesses are currently using over 14 combinations of different ESG frameworks.
As Krithi Krithivasan, President, Banking Financial Services, and Insurance at Tata Consultancy Services mentioned, companies need to recreate their business models to align with climate-rated criteria. However, introducing the ESG strategy in businesses is complex. The process requires “radical transformation”. Although the process is long-term, Krithivasan calls for business leaders to make decisions now.
Why is it important to take action now? In 2021, ESG assets were worth 37.8 trillion. By 2025, that may go up to 53 trillion, about ⅓ of all global assets under management. Companies that fail to follow ESG rules may fall behind.
Not to mention, the financial services sector has a big presence in the global market.
“Financial institutions have a very pivotal role in creating a sustainable future for all of us.” -Krithi Krithivasan
ESG is a good concept, but there might be a missing letter. According to Anne Simpson, Managing Investment Director, Board of Governance & Sustainability at CalPERS, “the letter F for finance should be added.” ESG feels separate from the investment process. Financial institutions need to close that gap.
The Importance of Corporate Reporting
One step to do this is through better corporate reporting.
As Simpson said, markets function on something very important: information. For this reason, corporate reporting needs to be true and fair.
“Hard working ordinary people have put their savings in financial markets and as fiduciaries, our responsibility is to make sure we’re deploying that capital in order that the returns grow sustainably.” -Anne Simpson
Global investors want to see consistency, coherence, and harmonization. But, this isn’t always the case.
According to an ESG research article, investors and financial analysts want to include ESG performance information in their investment decision processes. Inconsistent standards and reporting from the corporate level slows down ESG implementation due to a lack of accurate information.
Simpson says that market failure occurs when financial firms don’t have standardized information. It’s hard for businesses to fill ESG criteria if the standards aren’t clear. Without clear standards, many investors are left in the dark.
For clarification, Simpson uses an analogy. She compares the ESG investing situation to a can of beans without a label. The buyers or “investors” that buy the can don’t know that it has beans because there is no label to tell them. All they know is that there is something “good” or “valuable” in the can. The missing label is synonymous with corporate reporting. In short, investors don’t necessarily know what they are investing in due to the lack of regulated standards.
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As financial institutions get together to solve this issue, there’s something else to keep in mind. According to Sandra Schoonhoven, Head of Sustainability at ING it’s important to remember that the world is constantly changing. Reporting needs to be flexible so people can adapt.
Furthermore, the panelists talked about the International Financial Reporting Standards (IFRS) important role in this matter. Although IFRS provides valuable information for reporting, more action from other corporations is still necessary.
Difficult Conversations Can Lead to Results
As more financial institutions get involved in ESG, there is bound to be conflict. Not every sector will agree on certain regulations. Also, this is true if each sector is from a different part of the world. Nonetheless, debates can be productive.
According to Kashani, Head of ESG Credit at Apollo Global Management, debates on standards are necessary. For him, it would be more concerning if people came up with only one standard and there were no disagreements. Keep in mind that Kashani’s company has branches in Asia, Europe, and North America. In this case, policies created by Kashani’s team members in Mumbai, India may not be suitable for those in Los Angeles, California.
Different regions of the globe have different needs and want. Keeping this in mind may be helpful when establishing more consistent ESG reporting rules.
In addition, the debates show that corporate reporting needs to be flexible. Coming up with the standards will take time. It won’t happen overnight. Nonetheless, the debates can be a good step in the right direction.
Editor’s Note: The opinions expressed here by Impakter.com columnists are their own, not those of Impakter.com
