The trajectory of ESG has been chaotic particularly in fund management. Largely driven by political pressure it was taken ahead quite quickly before anyone could quite define what it was. In Europe the combination of the politics and the requirement to write detailed rules led to incomprehensible rules which were meant to be about disclosure but turned into marketing labels with regulators threatening penalties if you got it wrong.
Behind this was an acknowledged drive by the EU Commission to weaponise the financial services sector to force change because they did not have the powers to make companies make ESG disclosures. So, investment managers were being asked to make judgements where the basic data from companies was not available.
There was also increasing demand from asset owners and investors for investments which were ESG-certified. Many investment managers worked hard on their own protocols which they could explain to institutional clients, without being sure it would meet the regulators tests.
Into this gap jumped the rating agencies. Great, except their criteria were not clear and they produced conflicting results. The UK Government has now said they will find a way to regulate the agencies in their ESG business.
We know from the financial crisis that ratings can be beset by conflicts, and this may be present in the ESG world, but if we can gain clarity on how the judgements are being made the cause of ESG will be improved and the vital world of ESG might move forward from being a playing field for lawyers, activists, and regulators. And, perhaps, it could be helpful to interested retail investors too.
Philip Warland is a public policy specialist, and chairs FBC’s advisory council.
FBC has a programme of activity focused on ESG / Sustainable Investments to help corporate members discuss and discover best practices relevant to fund boards. Find out more.