Institutional investors are seeing a ‘tectonic shift’ in ESG reporting due to pressure from all areas of the industry, a panellist at the SS&C Intralinks Strategic Insights Summit in London stated.
The comment came during a panel entitled ‘How the regulatory landscape is reshaping ESG investing in EMEA’, in which panellists reflected on how ESG regulation is evolving, how firms are reacting and what they need to do for the future.
Vesselina Haralampieva, principal counsel at the European Bank for Reconstruction and Development, said that ESG is “critical for corporate performance.” Rather than being driven solely by an avoidance of risk, ESG consideration is key to driving value and offers a range of new opportunities for industry participants.
Although regulations are ‘broadly consistent’ across jurisdictions, there are still differences between them Haralampieva warned. This concern was seconded by Scott Newton, managing partner at Thinking Dimensions, who noted that both boards and C-suites are confused by exactly what they need to be doing. Although firms “really want to do the right thing,” working over several markets can make total compliance difficult, he added.
Reconciling regulations across borders is an issue that the industry urgently needs to address — a ‘daunting task’, Haralampieva acquiesced. There is a push for better convergence, but this is a ‘work in progress’ that will take a significant amount of time.
Although regulations are approaching the issue from different angles, they are all adding layers to basic principles, said Oliver Johnson, head of ESG for climate asset management at Mercer. In reality they share themes, reporting bases and outcomes; each version of regulation “hasn’t reinvented the wheel,” he quipped. The formalisation and standardisation of these into a single framework, then, should not be impossible.
That being said, firms have a need for legal, technical and reporting support to keep up with regulations and ensure that compliance requirements are met, he warned. Newton emphasised that companies want to understand what they should be reporting and the data that they should be using. With so many data sources available, it can be difficult to know which are reliable, he continued.
Additionally, the global connectivity of industries can present a challenge — what level of data needs to be reported? “We don’t have a solution right now,” Newton said of the issue. Resolving this issue will be greatly beneficial: “If you have data and transparency, you’ll make better decisions,” Newton went on, citing the benefits around governance, risk management and performance that could result from clearer information.
Offering their thoughts on how far away the industry was from convergence on ESG reporting, there was a broad agreement that it would be a gradual process. Europe is leading the way, affirmed Johnson, predicting that the ‘diet versions’ of EU frameworks seen in APAC and the US will develop over time to meet a single standard. Haralampieva stressed that companies should not be slowed down by reporting and regulation compliance, but should instead see it as an opportunity to bring opportunity and value to their business. Newton proposed that industry leaders will be the ones to drive convergence, putting standards in place within their supply chains that will become universally adopted. He added that, optimistically, he also hopes to see governmental convergence around ESG reporting.
Many firms are overwhelmed when considering ESG due to the large variety of topics that it encompasses. Organisations should begin by stating their values and how they will align with them, Newton suggests. Without focusing on particular areas “you can spend all your time reporting,” he warns. This reporting must also be statistically valid and accurate, he reminded the audience, with Johnson adding that this can be a challenge when standards for certain reporting requirements, such as biodiversity, are not yet in existence.
Haralampieva noted that there is a ‘knowledge gap’ across jurisdictions, stating that Eastern European markets are less prepared for SFDR II due to a lack of data and funding. There needs to be a push around policy and education, she argued, with companies sharing information across C-suites.
Providing advice to firms starting out in their ESG journeys, Newton assured the audience that change can be a positive action. Companies’ boards should be the starting point for change, he said, which will then expand to broader initiatives.
Haralampieva reiterated the importance of clearly identifying commitments, setting targets and “dedicating time to further engagement”. Disclosing these plans is also important, Johnson added, as is sticking to these commitments to avoid criticism or greenwashing allegations. “Make sure that what you put down on paper, you do,” he concluded.
