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Policymakers flag fears over ESG (in)action, data and standards

The inaugural sustainable finance conference of the Association of Financial Markets in Europe took place this month in Amsterdam. Capital Monitor went along to take the temperature on various key issues and encountered some big concerns.

By Virginia Furness

Danijela Piljic of the Dutch central bank says we must accept there may never be data for the value of some of the services provided by nature. (Photo courtesy of De Nederlandsche Bank)
  • A raft of regulators gathered at the inaugural sustainable finance conference of the Association of Financial Markets in Europe this month.
  • Investors and policy makers increasingly say stronger climate action is long overdue and the finance industry should not use a lack of data as an excuse.
  • Banks and corporates report serious teething issues with EU Taxonomy reporting, and politicians are raising doubts over the convergence of ESG standards.

Regulators, policymakers and the broader finance community met in Amsterdam this month to exchange ideas on investment, regulation and disclosure at the inaugural sustainable finance conference of the Association of Financial Markets in Europe (Afme).

Key areas of debate included how investors are holding companies to account on climate policies; the continued lack of sufficient sustainability data; and whether the market will ever converge on agreed ESG reporting standards.

Capital Monitor attended the event on 11 and 12 May and noted various key takeaways from the speakers on stage and the conversations on the sidelines.

No time to wait for the data

Lack of data is frequently cited as an obstacle for sustainable investment and finance, particularly in more nascent areas such as biodiversity. But investors and other financiers slowly appear to be accepting what scientists have been saying for years: we do not have time to wait for the metrics and information we would like around sustainable assets.

Some regulators are taking a similar line. “We need to accept there may never be data for some existing services or values of nature,” Danijela Piljic, strategy adviser at De Nederlandsche Bank (DNB), the Dutch central bank, told Afme delegates. “You just have to accept it and work with imperfect data.”

DNB has, alongside the Dutch Environment Agency, produced several influential studies – including one in June 2020 that found Dutch financial institutions alone have €510bn of exposure to biodiversity risks – and urges other institutions to get started. “You’ll be surprised what you can come up with imperfect data,” Piljic said. “You need to learn by doing.”

Sarah Breeden, currently the Bank of England’s executive director for financial stability strategy and risk, made a similar point in May last year. Bankers may not have all the data they want to perform climate stress tests, she said, but given the urgency of the climate crisis, they must work with what they have.

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Indeed Hans Stegeman, chief investment strategist at Dutch firm Triodos Investment Management, accused the financial industry of using the lack of data as an excuse for inaction. He called on fellow panelists to take responsibility and action. “We know there are risks, but the risk of no activity is even bigger,” Stegeman added.

Doubt over ESG standards convergence

Such thinking was further reinforced by Paul Tang, a member of European Parliament. In a frank keynote address, he said he expected continuing divergence on ESG reporting standards.

“We live in a world that is not geared towards global cooperation, and I don’t expect it,” he said. “The best we can hope for is for the two approaches work together. Single materiality is a step up.”

Tang was referring to the differences in approach proposed by the International Financial Reporting Standards (IFRS) Foundation and the European Financial Reporting Advisory Group (Efrag). The former has launched the International Sustainability Standards Board (ISSB), while the latter is developing the technical framework under which some 50,000 EU companies will be mandated to disclose on ESG.

The key difference is that Efrag’s standards include reporting on the double materiality of ESG issues across the board, while the ISSB focuses largely on climate – the ‘E’ of ESG – and does not incorporate double materiality. Under that approach, businesses must report not only on the impact of climate on their businesses but also their businesses’ impact on climate.

Hans-Christoph Hirt, trustee director at Hermes Group Pension Scheme, says “engagement washing” is an issue.

Representatives from the IFRS and Efrag late in the day took to the stage and reaffirmed these areas of focus.

Questions raised by delegates on the sidelines included: what will be the next step after climate reporting for the ISSB?; and without comparability, will companies have to report under both Efrag and the ISSB?

Investor engagement issues

A related hot topic under discussion at the Afme event was shareholder engagement. It is seen as a key tool in holding companies to account on climate policies. But increasingly stringent shareholder resolutions being brought by non-government organisations are turning some asset managers off. For instance, BlackRock said this month it would support proportionately fewer shareholder resolutions on climate change.

Similarly, an executive from a big, climate-focused shareholder of Standard Chartered told Capital Monitor that his company abstained from voting on a resolution brought by Friends Provident Foundation at the bank’s AGM on 4 M aycalling on it to align its fossil fuel financing with the International Energy Agency’s net-zero pathway (IEA NZE) by 2050.

“There is a view that pushing companies to align with the IEA NZE is not pragmatic and that these [resolutions] are too prescriptive and [because of this] are seeing declining support,” said the investor on condition of anonymity.

A related issue is what Hans-Christoph Hirt, trustee director at Hermes Group Pension Scheme, calls “engagement washing”: that is, asset managers claiming to engage with thousands of companies, which he said was not credible.

Ben Constable-Maxwell of M&G Investments wants to see more sector guidance from the EU’s Taxonomy of sustainable activities. (Photo courtesy of M&G)

While shareholder engagement can be an effective tool to achieve change in companies, the onus is on asset owners to ask better questions of their asset managers. For their part, asset managers should be able to articulate exactly the role they played in any active engagement or resolution. In some cases, there is perhaps too much expectation that investors fully understand the decarbonisation paths of their portfolio companies.

More sector guidance from the EU’s Taxonomy of sustainable activities would lead to more effective engagement, said Ben Constable-Maxwell, head of sustainable and impact investing at British asset manager M&G Investments. It would help investors understand the milestones that companies in sectors such as shipping will have to reach, he added.

“We don’t really have the scientific thresholds, which should be the basis of our engagement,” said Constable-Maxwell. The Taxonomy should, in an engagement context, help steer investors as to the milestones they might want to set companies, he added.

His was a hearteningly optimistic view at time when the sustainability agenda is facing widespread scepticism and a backlash. Many feel greenwashing (and other forms of ESG washing) is the central problem. The hope is that the faster regulation and norms can be set in this area, it seems, the easier it will be to spot and call out such practices.

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