The past years have seen a surge in demand for funds to invest according to environmental, social and governance (ESG) principles. While this market trend is reflective of wider cultural movements, global regulators are calling for more transparency and clearer definitions in response to concerns of greenwashing and transparency.
Taking ESG principles into our decision-making process is a relatively new phenomenon. However, since the planet has slowly started to cook and our culture has shifted its preferences, we have had to rethink our investment strategies.
According to financial services business Morningstar, last year, in Europe alone, sustainable and ESG-focused funds have attracted €233bn in investments. This is almost double the amount than the previous year.
While more money is good news for sustainable and ESG funds, The Notorious B.I.G had a point when he said “Mo Money Mo Problems”. Indeed, the main problem is a lack of overarching definition of what falls under ESG principles. This in turn leads to a whole array of other issues.
Vogue and vague
Although, in general, sustainability, social and governance principles all sound like a good idea, at the end of the day their definitions are rather vague and subject to interpretation.
While this is not a problem in and of itself, it makes it possible for sustainable and ESG funds to appropriate and measure these terms according to their needs. What counts as sustainability for one ESG fund might very well not count as sustainability for a different fund. This in turn makes it very hard to determine whether ESG funds actually deserve their ratings or not.
This problem is not a new one however. But with the increasing sums of money and greenwashing concerns on the rise, the International Organization of Securities Commissions (IOSCO) has decided it was time to set up a global body to write mandatory global standards.
“We are now working on ways to ensure better transparency and clearer definitions. Our work is likely to involve guidance to service providers and ratings agencies, together with recommendations for regulators on how to deal with potential conflicts of interest,” Ashley Alder, chair of a transnational IOSCO body told Reuters.
ESGs in Luxembourg
As an expert in financial affairs, Luxembourg has already put efforts into increasing transparency surrounding the use of ESGs. Indeed, the Luxembourg Stock Exchange has already published some guidelines on ESG reporting procedures.
While this puts Luxembourg ahead of many other European countries, local guidelines are no panacea in a global market.
“We can’t simply work in jurisdictional silos when the climate emergency does not respect national boundaries. Global investors need global comparability,” Alder explains.
With the IOSCO expected to publish a full report mid-July and to set up a global body by November, the ESG conversation is finally moving in the right direction.