Environmental, Social, and Governance (ESG) considerations have hovered on the periphery of the public conscious (and the minds of policy drivers and investment managers) for several decades. However, recently their importance has taken center stage with the convergence of several related developments, especially:
A growth in support for Green political parties
Enhanced social media coverage of ESG topics
The adoption of ESG-based investment strategies to mitigate risk and/or achieve alpha
The emergence of visible evidence of global warming coupled with definitive scientific consensus on the topic
Global warming-induced environmental catastrophes (e.g., marine plastic pollution, wildfires, hurricanes)
Enhanced transparency of poor labor practices and governance failures, including through high-profile leaks
A predilection of a certain demographic for ethical investing (e.g., millennials and generation z)
Many investment firms have sought to capitalize on the popularity of ESG investing that has accompanied the above phenomena by providing differentiated “sustainable” offerings that have enabled them to retain or even capture market share, whilst at the same time burnishing (or greenwashing) their “Corporate Social Responsibility” credentials.
The Basics of the EU ESG Regulatory Regime
The commercial scramble to capture market share in the ever-growing ESG investment segment has (further) fueled a proliferation of voluntary non-governmental standards that have filled the vacuum left by an absence of regulation. It has also led to an entire ESG data and analytics industry springing up to service the needs of the investment community.
These latter developments have led to market fragmentation, opacity, and heterogeneity in quality between and among the voluntary standards and associated offerings, which has ultimately led to greenwashing with investors left bewildered as to how to distinguish between genuinely sustainable investments and mere marketing puff. To overcome this market fragmentation, EU policy drivers have developed a single set of regulatory standards that require investment firms to demonstrate the provenance of their ESG claims with robust data and analytic disclosures.
The “pillars” of this approach include a non-financial reporting directive, shareholder rights directive, sustainable finance disclosure regulation, climate benchmark regulation, and an EU Green Bond standard.