Shining a Light on Environmental, Social and Corporate Governance (ESG) – A Blog Series

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In this blog series ResearchPool investigates the impact of the adoption of Environmental, Social, and Governance (ESG) standards on investment managers – particularly the importance of having robust data management solutions in place to measure ESG performance.

According to analysis by Bloomberg Intelligence (February 23, 2021), they anticipate over US$53 trillion will be invested following ESG criteria by 2025, representing more than a third of global assets under management.  

Although there are numerous drivers that explain the surge in ESG, the two main mega-trends influencing investor behaviour seem to be climate change and the Covid 19 pandemic. Interestingly a recent Natixis research report highlighted that more than 71% of investors now want to make an positive social impact with their investments (2021 ESG Investor Insight Report). 

It does therefore seem that ESG is much more than just a passing fad, and one that all investment managers need understand and take the necessary actions to implement.

For ESG to become mainstream, standardized reporting will be required to drive adoption. Regulators have started the process to create a common language for ESG, particularly for corporates and institutional investors, however this may take some time as they are currently rolling out a flurry of new regulations.

A positive aspect of increased ESG transparency will be to shed light on those firms that have adopted greenwashing strategies [the practice of creating a false impression or providing misleading information about how environmentally sound accompany is].

However, as the ESG ecosystem becomes more complex and regulated this will in no doubt impose on investment managers greater reporting requirements and a proliferation of data that will need to be captured and analysed to generate these reports. This is the area where ResearchPool is working with clients to develop solutions that will help their data management, analytic, and reporting requirements.

Over the coming weeks, this blog series will explore these regulatory changes in more detail, identify how are they impacting investors, and what solutions are likely to ease the impact.

In next week’s blog, we will start exploring the three central European ESG regulations that will impact firms, namely: CSRD, SFDR and TAXONOMY.

Corporate Sustainability Reporting Directive (CSRD)

As its name suggests, CSRD will impact corporates. Investors adopting ESG strategies in equity, bonds or alternatives asset classes will require having access to data disclosed by corporates. Prior to May 2021, EU corporate sustainability reporting requirements were set out in the Non-Financial Reporting Directive (NFRD). The European Commission has decided to enlarge the scope of these reporting requirements through the implementation of the Corporate Sustainability Reporting Directive (CSRD). We will outline the key regulatory requirements, the main changes and highlight the main challenges for corporates.

Sustainable Finance Disclosure Regulation (SFDR)

The Sustainable Finance Disclosure Regulation (SFDR) imposes mandatory ESG disclosure obligations for asset managers and other financial markets participants.  It applies to participants that incorporate ESG strategies. The directive affects disclosures at entity and product level to improve sustainability‐related disclosures to end investors whilst also disincentivising greenwashing. We will analyse the current situation of this regulation, the underlying intention of the regulation as well as identifying the main challenges for financial market participants and advisors.

Taxonomy Regulation

The EU Taxonomy Regulation sets out a classification system, establishing a list of environmentally sustainable economic activities. It can be seen as an extension of the SFDR regulation as taxonomy aim to translate the EU’s climate and environmental objectives into a common classification system for sustainable economic activities. In essence, firms that align their investment policy to environmental objectives or promote environmental-friendly funds will need to use this standard classification system. We will analyse the current situation of the taxonomy, how asset managers use this system, and the status of ongoing discussions surrounding it.

ResearchPool will publish this ESG blog series on Wednesday afternoons’ until end-November 2021.

Join us on the journey!

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