Recently, there has been a rising stakeholder demand and an increased media attention on incorporating ESG criteria into financial investment decisions. ESG led investments have had huge impacts on asset inflows and sustainability is no longer just a trend but a vital prerequisite for a well-constructed portfolio. COVID-19 and natural disasters such as the recent cyclonic storm in Mumbai ‘Tauktae’ have only amplified the need to direct finance flows towards green sectors.
ESG based reporting was first conceived in 2006, by the United Nations, Principles of Responsible Investment (PRI). Since then, it has gained traction as it appealed to conscious investors seeking value-based returns along with financial gains. However, even as ESG continues to receive necessary attention, there have been growing speculations on whether ESG is a passing fad or is here to stay.
Business leaders integrating ESG concerns into business strategies, including its core operations, supply chains, customers, employees, communities and more; have shown to create competitive advantages and improving access to capital. A global survey conducted by BNP Paribas showed that, “the percentage of surveyed asset owners who put more than a quarter of their funds towards ESG increased from 48% in 2017 to 75% in 2019. The survey also showed that long-term returns, brand and decreased investment risk feature among investors are the top three drivers for incorporating ESG into their investment decision-making”.
Rapid growth of ESG-led investments have shown resilience to recent market turmoil, and yet, embedding sustainable investment practices into investment decisions remains a not-so-easy task. However, even as the investment focus has shifted to evaluation based on ESG factors, the interpretation has been overly simplified, which in turn has led to ambiguity and disorientation. Presently, there is a lack of a coherent mechanism and a ubiquitous method to quantify and measure ESG data across sectors and industries. In the absence of reliable and standard frameworks, many asset managers and asset owners fail to define E, S and G within the scope of ESG investing.
Amongst the many frameworks, GRI, CDP, SASB, TCFD and WDI are the most widely used reporting frameworks today as stated by Greenbiz.
Launched in 1997, by Bob Massie and Allen White, with the support of their organizations, Ceres and the Tellus Institute. The purpose of GRI was to create an accountability framework for companies to show stakeholders how they align with the Ceres Principles for responsible environmental conduct. Later, the framework expanded to include social, economic and governance issues. GRI began using the term ESG in 2009, and today, several stakeholders, including investors, businesses and governments, use the GRI Sustainability Reporting Standards to communicate on a range of impacts, including climate change, human rights, governance and social well-being.
In 2000, Paul Dickinson started the Carbon Disclosure Project (CDP) with the goal to create a “global economic system that operates within sustainable environmental boundaries and prevents dangerous climate change. “The idea behind the CDP was for businesses to consider environmental reporting and risk management as part of its core responsibility, in an attempt to transform capital markets.
Started by Jean Rogers in 2011; the aim of SASB reporting was to develop standards that situated “sustainability fundamentals” alongside “financial fundamentals” — “such that investors could compare performance on critical social and environmental issues, and capital could be directed to the most sustainable outcomes,”. SASB’s framework is intended to complement other initiatives, including those from GRI, CDP, the International Integrated Reporting Council and the Taskforce for Climate-related Financial Disclosures (TCFD).
In April 2015, the Financial Stability Board (FSB) established the TCFD to develop recommendations for more effective climate-related disclosures that could promote more informed investment, credit, and insurance underwriting decisions and, in turn, enable stakeholders to understand better the concentrations of carbon-related assets in the financial sector and the financial system’s exposures to climate-related risks.
The Workforce Disclosure Initiative (WDI) was created in 2016 by the “responsible investment” non-profit ‘ShareAction’ in the UK. The framework, modelled after the CDP, collects data on the management of both direct employees and supply chain workers in an effort to provide institution investors with meaningful information. As of 2019, the WDI had 137 investor signatures and 118 companies using the framework.
Even as these frameworks cater to different sectors and identify most relevant metrics to disclose ESG data, a uniform and holistic approach is need of the hour. As the economy slumps due to the COVID crises, it calls for action from financial institutions, regulators, NGOs, governments and intergovernmental agencies; to further innovate and collaborate on reducing complexity of ESG related disclosures. Policymakers and regulators need to participate in the process of improving the coherence and consistency of sustainability reporting and ratings, while also ensuring that these standards remain market driven. The development of guidelines and taxonomy will be crucial to achieve comparable index-based result-oriented evaluations.