In a recent survey by State Street Global Advisors, 52% of European investors cited regulation as the key driver toward ESG adoption. Yet, despite attempts to introduce regulatory requirements, a lack of standardisation in reporting obligations is proving a significant challenge towards achieving meaningful progress.
Ahead of the inaugural SustainableFinance.Live Co-Creation Workshop, hosted by Finextra Research and ResponsibleRisk, we spoke to Elena Philipova, global head ESG proposition at Refinitiv, about the pivotal role standardisation will play in the development and refinement of a healthy ESG environment. Elena Philipova is also a Finextra Sustainable advisory board member.
Philipova says that while there are many hurdles for companies and investors to overcome in order to meet sustainability goals, “it is important to highlight that it is not a problem of financing. The capital needed to finance the SDGs is available, but it needs to be channelled in that direction relatively quickly and at scale.”
“This presents an economic opportunity because achieving the SDGs will not only enable us to sustain living on the planet but could also open $12 trillion worth of market opportunities, as well as create more than 380 million new jobs.”
As the opportunity holds so much potential, it is hard to believe that investors and businesses are being held back from achieving these goals. Philipova explains that “the complexity businesses face with the SDGs is the lack of definitions, standards and labels. How are companies expected to track their impact against the goals in a comparable, scalable and consistent way?”
She continues to say several initiatives are attempting to address this problem and develop standards to measure impact against the goals, such as the UN Taskforce on Digitalization and the financing of the SDGs.
“European regulators are leading the way with the most comprehensive and ambitious plans put forward thus far on transitioning capital markets to be sustainable and finance the 2030 Agenda. This top down pressure is making all market participants, large and small, elevate sustainability to the top of their priorities.”
The ability to measure ESG risk is a key priority for 97% of institutions when determining how to weight their investment portfolio, State Street’s report found. The report notes that investors need the right data to make the right ESG decisions and yet the current state of ESG data is a substantial hindering factor to adoption.
As ESG data providers generally develop their own sourcing, research, and scoring methodologies, the rating for a single company can vary widely across providers.
The report says that a lack of transparency complicates the situation, as most providers treat their process as proprietary information. It states: “By relying on an ESG data provider’s score, asset owners are taking on the perspectives of that provider without a full understanding of how the provider arrived at those conclusions.”
Philipova adds: “For Refinitiv, ESG is fundamental data about companies so the same principles that apply to financial disclosure should be applicable to material ESG disclosure too. What is needed are, consistent definitions, minimum reporting standards, and mandatory disclosure requirements.”
This issue of standardisation and terminology carries over to the issue of green bonds and their ability to be adopted more effectively.
Philipova argues that in order to increase the issuance of green bonds and channel more capital towards them, “the market needs the creation of industry wide standards and labels. This is also in line with the European Commission Action Plan on financing sustainable growth.”
The proposed EU Green Bond Standard (EU GBS) aims to enhance the effectiveness, comparability and credibility of the green bond market and to encourage market participants to issue and invest in green bonds.
“I would also argue that in order to maintain integrity and facilitate quicker evolution of capital markets to become more sustainable, it would make more sense to describe green bonds or finance as sustainable bonds or finance.
“Such a terming would not only enable better diversified portfolios suitable for a wide range of investors but would also enable investors to realistically include firms in the brown economy which are transitioning their business models rather than either side-lining them or describing an oil company as ‘green.’”
The factor of trust also plays into the landscape. Philipova concludes: “to create trust and reliability amongst users, issuers should also get an external reviewer to verify the data published. It is essential to track and report impact in a consistent manner across issuers by aligning to market standards and principles.”
Finextra Research and ResponsibleRisk will be focusing on sustainable finance in commercial banking at the first SustainableFinance.Live Co-Creation Workshop on Wednesday 4th December at 6 Alie Street in London.
Register your interest here for our inaugural event, where you can discuss what is driving the demand for sustainability and why companies are struggling to meet the benchmark set by the UN General Assembly’s Sustainable Development Goals (SDGs).