Could making ESG more 'financially relevant' combat greenwashing?
At the first day of edie's Sustainable Investment Conference, expert speakers from EY, JP Morgan, Credit Suisse and Citi debated how the definition of leadership in relation to ESG investing is evolving. Here, we round up their key talking points.
Recent weeks have seen a number of headlines showcasing the scepticism that exists towards mainstream ESG approaches in the financial sector. Bloomberg has published a feature interviewing former sustainability executives at finance giants, who argue that markets alone will not drive the necessary climate action from corporates. Research from Quilter found that greenwashing is investors’ biggest concern around ESG products. The International Organisation of Securities Commissions is preparing regulatory guidance for naming and advertising green financial products in markets including the US and China.
It was timely, then, that edie’s Sustainable Investment Conference began on Tuesday (13 July), bringing together hundreds of professionals across the financial value chain for discussions on what the “new era of ESG leadership” should look like, with the need to deliver a global response to the climate crisis and a strong economic recovery from Covid-19 on the table.
The keynote speech for the morning was delivered by EY’s global vice-chair for sustainability Steve Varley, who argued the case for an evolution “beyond” ESG and to FESG+. The ‘F’ stands for “financially relevant”.
Varley said: “To realise its full potential, ESG needs to evolve from being an alphabet soup of competing standards to a standardised system of complimentary ones. Then, to go beyond being seen as a compliance-based ask to a strategic enabler. And, it must be a tool, whereas many see it as a burden today. This process will be challenging.
“ESG needs to align ever-more closely with financial reporting, to innovate even more quickly, adapting to changing demand. FESG can enable businesses to deliver meaningful change.
“If you think about it, the separation of the ‘F’ from ESG has reduced the impact of ESG; many capital markets are attuned far more closely to financial movements than anything else.”
Varley was asked how investors could avoid giving the ‘F’ too much weighting compared to the other elements. He stated that it is not a question of weighting per se, but an increasing shift towards investors wanting companies to properly draw up and disclose the financials of their plans for major environmental and social projects - in terms of costs and benefits.
“Investors are asking how much it will cost to be, for example, net-zero by 2030, and what the trade up for 2028 or 2025 would be,” he said.
Varley’s recommendations for businesses looking to adopt a FESG+ approach were to engage with stakeholders’ appetite for “change, not just transparency”; respond to investor pressure; prepare for incoming change from legislation; improve data quality and analysis and “embed the approach widely” across all functions.
After Varley’s speech, experts from JP Morgan, Credit Suisse and Citi took to the stage for a panel discussion on the virtual stage.
First to speak was JP Morgan’s managing director and head of EMEA Chuka Umunna, who agreed that a lack of quality data, comparable metrics and unified standards are key challenges to ESG investing.
Umunna said: “Looking at the technical ESG investing landscape, it’s clear that there is not enough good, sound data. It is improving in the environmental space but certainly not on some of the social metrics.
“We need to see some consolidation both in the methods used to score corporates on ESG – at the moment, it’s a very difficult landscape for our clients to navigate – and also in terms of the global standards and frameworks…. I do believe it requires public policy leadership. We’ve seen progress by the market but let’s be honest; a lot of market participants have a commercial interest in this.”
Credit Suisse’s chief sustainability officer and global head of sustainability strategy, advisory and finance, Marisa Drew, outlined that she stands “in violent agreement” with Varley and Umunna’s points on the issue.
Then, Citi’s managing director and head of sustainable finance Jason Channell explained why he thinks the new era of ESG leadership will be defined as a willingness to “holistically” engage with the global transitions needed to combat the climate crisis and stop biodiversity loss while generating benefits for society.
Channell said: “When we think about what financial markets and institutions do, we deal with risk and opportunity. To me, that is what ESG is about. Yes, it has all sorts of social and environmental connotations but I don’t think we should view this as something different; it’s a wonderful opportunity where the things financial markets and institutions have always done align beautifully with societal needs.
“We’ve totally put to bed this concept of ESG as a cost.”
With the end of this assumption, Channell argued, now is the time to go beyond backward-looking data to forward-looking metrics. This would enable investors to see more clearly the long-term risks associated with investing in high-carbon assets which, when compounded by signals from policy and from investor coalitions, could help to shift capital at the scale and pace needed.
There is still time left to register to attend Day Two (Wednesday 14 July) of the Sustainable Investment Conference 2021. Click here to view the agenda and reserve your place.