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The ESG Review: Why ESG is poised to shake up and grow up

Tighter regulation of ratings companies that stand to shake up the sector were put forward by the European Union this week, in a move that could have broader implications for the maturing of ESG investing.

The proposed shake-up of how companies are allowed to provide ESG ratings will centre on the decoupling of that information from consulting, credit ratings and benchmarking services to avoid potential conflicts of interest, according to Reuters.

Providers would be overseen by the European Securities and Markets Authority (ESMA) and risk hefty fines if they breached the new rules.

Making the announcement, the European Commission set out a taxonomy for its sustainable finance framework that it believes will help to “direct investments to the economic activities most needed for a green transition”.

In its update report into clamping down on greenwashing last week, ESMA said that the need to avoid misleading sustainability claims - whether intentional or not - put a duty of care on companies to be clear and balanced. In other words, clear and accurate communication will be at a premium. The body is due to publish a final greenwashing report next April, which may include potential changes to the EU’s regulatory framework that would further impact reporting for many companies based in or doing business in the bloc.

How this may land in parallel in the City of London is a little hazy at this point, although the UK has touted a Green Finance Strategy that will aim to make ESG-related investing clearer and tackle greenwashing, with the inclusion of nuclear energy in its taxonomy a point of media fixation so far.

Despite the political football moments that have surrounded the acronym ESG in recent months, it seems that far from being dead in the water, the drive for creating value from sustainable and responsible business is growing up, despite getting shouted at a lot.

This long article in Quartz sets it all out neatly. Amidst its many points is the one that while much of the bad air around ESG has been about claims and framing intended to woo investors in the the short-term, as the approach to clearer and more rigorous investing matures it will support longer-term investment horizons that enable businesses delivering on ‘true’ ESG strategies to flourish. That will also mean addressing the priorities of individual investors in it for the duration alongside institutional ‘compatriots’.

“It is time for serious investors to get serious about ESG, ideally to the point that it is no longer an investment ‘category’ but, rather, a mainstream strategy. Perhaps it’s the only logical one for a market concerned with returns for individual shareholders in the transition to a carbon-neutral economy,” the article said.

A piece in Fortune deconstructed the current state of affairs further, under the headline ESG is dead. Long live E, S and G (yes purists, not truly a headline if it has a full-stop in the middle). It makes the case against a ‘lumped together’ approach to ESG investing given the flaws in current models and methods for supporting that, and makes the case for a more prescriptive and detailed way forward in which environmental, social and governance action and achievement are regarded in their own respective lights.

That may make some sense in theory, but it’s not too difficult to present a counter-case that while in need of a more mature approach, many of the main E, S and G factors overlap with each other, particularly where strong governance can result in positive change.

Much still to be determined, but the drive for much-needed clarity in investing is gathering pace, as ESG reaches puberty and starts to think about a proper shave.

The ESG News Review is written by Steve Earl, a Partner at BOLDT.

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