As the global economy stirs from its pandemic slumber, the rise of environmental, social and governance (ESG) investing is quickly becoming not only a focus of business discourse, but also an action item for organizations across sectors. Governments are looking to “build back better” by investing in green infrastructure and emission reduction initiatives, or issuing sustainability bonds – measures that are designed to drive post-COVID economic recovery and growth. Industry is also looking to find its innovative edge and competitive advantage in a lower-carbon economy – announcements from companies committing to net-zero carbon emissions are now a regular occurrence. According to Ecosystem Marketplace, the number of companies making climate-neutral or net-zero pledges has doubled during the COVID-19 pandemic. On the finance side, significant amounts of capital are being directed to investments in renewable energy and clean technologies. A June 2020 report from Goldman Sachs expects that renewable power will become the largest area of spending in the energy industry in 2021, surpassing upstream oil & gas for the first time in history based on their estimates. Goldman Sachs notes that these investments will encompass mostly renewables, biofuels and the infrastructure investments necessary to support electrification initiatives.
One year in, the COVID-19 pandemic has exposed vulnerabilities in the economy as governments and industry manage the impacts of lockdowns and changes in consumer behaviour. The need for more responsive risk management approaches has put a spotlight on ESG as an important factor not only in creating value for organizations, but also enabling them to be more nimble in dealing with risks to business such as climate change. In particular, the pandemic has highlighted the need to quantify and manage these risks. Diversity and inclusion are also being increasingly seen as essential to boosting the value of companies.
As ESG factors play an increasingly important role in assessing credit and market risk, investors are looking for more meaningful information – this highlights the need for consistency in disclosure standards. Part of the challenge for stakeholders is the sheer number of existing frameworks and voluntary standards for ESG reporting, some of which overlap but are not directly comparable. As a result, investors and other stakeholders have been calling for regulators to harmonize and streamline ESG disclosure standards. The launch of several initiatives in 2020 demonstrate the priority that stakeholders have placed on consolidating such disclosure standards. This article provides an overview of ESG and the leading ESG standards, as well as an update on efforts to establish a common global standard for ESG.
ESG – A Primer
The Financial Times Lexicon describes ESG as “a generic term used in capital markets and used by investors to evaluate corporate behaviour and to determine the future financial performance of companies.” ESG criteria are non-financial factors that investors apply as part of their evaluation process to identify material risks and growth opportunities, and to assess the future financial performance of companies. ESG factors are increasingly being taken into account alongside financial factors in the investment decision-making process. The components of the ESG triptych can be described as follows:
- Environmental criteria consider how a company performs as a steward of nature.
- Social criteria examine how a company manages relationships with employees, customers, suppliers, and local communities.
- Governance criteria look at company leadership, executive pay, audits, internal controls, and shareholder rights.
The term “ESG investing” refers to a class of investments that seek positive returns and long-term impacts on society, environment, and the performance of the…