2022 has so far been a very interesting year for ESG. Whilst some naysayers have been saying ESG has had its time, the realists among us understand that this is just the beginning for ESG. So what are the ESG trends we can expect to see for the rest of 2022? What are the challenges to be faced, and what’s next for ESG. We spoke to Monsur Hussain, Head of FI Research at Fitch Ratings who shares his insights in this article.
The need for foundational metrics will be met by global initiatives such as the IFRS Foundation’s new standard-setting board—the International Sustainability Standards Board (ISSB)— to set global IFRS Sustainability Standards to help meet this demand. The intention is for the ISSB to deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions.
And, at the EU-level, the Corporate Sustainability Reporting Directive (CSRD), will ensure that in-scope entities provide consistent and comparable sustainability information when it applies to companies from 2024.
The key challenges are not only data availability, but consistency and fitness for purpose. The absence of consistent, robust, verified data standards makes it difficult to compare the ESG characteristics of one company with that of another. Data may be entirely missing for certain metrics and asset classes. Shortcomings in the quality of data have implications for downstream reporting and disclosure obligations that arise from regulatory requirements.
One of the most common themes of ESG commentary is the need for standardised reporting. There are still numerous reporting frameworks that investors and companies need to navigate and consider when seeking to comply with the existing and forthcoming disclosure obligations.
UK regulators are drawing up proposals for sustainability disclosure requirements that may pass by the end of 2022, following the EU Sustainable Finance Disclosures Regulation (SFDR) that was passed last year. But there is a growing risk of divergence between the UK and EU standards that may add to the complexity, cost and confusion for investors.
Therefore, it is in the interest of wider stakeholders for disclosure standards to be harmonised so as to reduce fragmentation which ultimately might result in higher costs for end-consumers.
Aside from dealing with the multiplicity of definitions or taxonomies of sustainability, the proliferation of standards carries a risk that labels are too complex and difficult for users to understand.
A good example is that of the EU’s SFDR. While this regulation has undoubtably been helpful in terms of carving up a large universe of potential funds, asset managers appear to have taken different approaches and interpretations to fund classification that could lead to greenwashing. This serves to highlight the importance of not taking labels at face value and undertaking due diligence.
Permutable’s granular analysis can help investors and other stakeholders differentiate those funds that are said to promote ESG characteristics, from those that have a sustainable investment strategy in activities aligned to the EU taxonomy.
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