Given the lack of standardization, how should FIs think about ESG reporting?
- Creating a well-defined global framework for ESG and sustainability factors will bring more accountability in the financial sector, but this task is very complex in nature.
- Financial institutions are increasingly feeling the pressure from an ESG standpoint, given the SEC crackdown and demands from consumers, but the lack of standards makes it hard for them to formulate a strategy.
Currently unregulated and unstandardized globally, ESG is becoming an increasingly confusing arena. And as the financial industry gets more involved in this field, questions and issues are mounting.
“When I talked five years ago to clients, ESG was hardly a topic. Now, almost everyone wants to issue a sustainability bond,” said Hans Biemans, managing director and head of green and social bonds at ING during a panel at Money 20/20 Europe.
There is no doubt that creating a well-defined global framework for ESG and sustainability factors will bring more accountability in the financial sector. Right now, each company sets its own standards, and even the same company can get different results to the same issue given the vast amount of methodologies currently available.
Angel Agudo, VP of product at Clarity AI, a platform that helps companies assess and report climate risks, believes there are two main parts of the overarching problem – one about quality and the other about quantity.
Regarding quality, the lack of ESG reporting standards leads to a lot of differences when trying to compare companies. The quantity aspect relates to the fact that, given the lack of standardization, companies are free to report the information they feel is most important.
“You need to be sure you are comparing apples to apples, so you can extract the right conclusions about companies, through technology and combining different sources of information,” Agudo said.
But developing a global standard for a complex issue like ESG is not an easy feat. In Europe, there is the EU taxonomy that defines sustainability and outlines ESG criteria, and this is becoming a benchmark for the rest of the world.
European companies are mandated to report this year to report what percentage of their sales is sustainable, for example -- information that is then used by banks and investors to analyze how sustainable their portfolios are, according to ING’s Hans Biemans.
It will be a long journey to an international standard, though, as different geographies come with different reporting requirements. Plus, there are a lot of issues wrapped up under the ESG criteria, making it all the more confusing.
“We are not introducing sufficient guidance to help companies actually navigate all of these issues and what's material to them. They need to know what to focus on; otherwise, it creates a situation where ESG becomes about everything and nothing. And that creates a lot of distrust and confusion in the market,” said Anna Krotova, director of sustainability at Mambu, a software-as-a-service banking platform.
Companies need to have clear information defining things in detail, as the ESG space is still new. Precise definitions are necessary so companies can be sure that they are incorporating the right information, Angel Agudo added.
“We have seen several scandals lately, showing how important it is for financial institutions to do things right, and not doing greenwashing or not being accurate to what they claimed to be,” he said.
But with the growing attention on sustainability issues, companies also feel pressured to claim some sort of strategy in this area, leading to suboptimal disclosures at best, added Anna Krotova.
“I think we need to acknowledge that ESG is a field in its own right. It has its own science – we have to stop deferring it as an addendum to the work of the compliance department. We need to have targets and objectives really embedded in the business,” she said.
Krotova also pointed out that forcing enhanced disclosures and standards isn’t equivalent to forcing the right action being taken. ESG is only a tool – essentially a spreadsheet of data points one needs to measure to understand their non-financial performance.
“The analytical and intellectual work that puts that data in context to understand how it translates into the impact on the world and what actions you need to take as a result of that analysis – that’s something outside of the ESG remit; it doesn’t belong there,” she said.
Agudo also stresses the importance of differentiating between risk analysis and impact analysis, as the risk component is a tool to understand the systemic risks, which has implications for other companies as well.
“Most of what has been created around this industry has been risk assessment, but it’s been used as an impact dimension – what you can see in the headlines around ethics and values. Please don’t mix this tool because that is not useful for the industry,” he said.
Finally, Krotova argued that companies should ask themselves what their ultimate goal is – are they just trying to get the problem off the books through assets and divestment, or could they really change the business model, mindsets and practices to create better outcomes for everyone?