The push for environmental, social, and governance standards

The rise of environmental, social, governance, and sustainable investing is clear and bound to increase. But key questions remain as companies and financial institutions continue the push: What counts as progress, and how should it be measured? Similar to the impact investing space, there are many different frameworks, metrics, and organizations working to define sustainability and determine how to measure it. But experts say the system needs to move toward a global standard, or else it risks mislabeling companies or investments as sustainable, green, or compliant with the Sustainable Development Goals when they are not. Corporate and investor priorities are shifting from “short-term shareholder profit maximization” to stakeholder responsibility, so now is an important moment to establish a standardized framework, said Klaus Schwab, founder of the World Economic Forum. “We are witnessing a mindset change,” he said during last month’s Davos Agenda event. “What we have to do now is walk the talk,” he said, adding that a framework of metrics would allow transparency into a company’s environmental, social, and governance — or ESG — performance. It seems clear some companies are thinking differently, particularly when it comes to the environment. General Motors Co. announced late last month that it would stop making gasoline-powered cars by 2035 and be carbon neutral by 2040. Also last month, BlackRock CEO Larry Fink released a letter asking all the companies it invests in to share a plan for “how their business model will be compatible with a net zero economy.” In 2020, Fink asked companies to report using the Task Force on Climate-Related Financial Disclosures and the Sustainability Accounting Standards Board standards, resulting in a 363% increase in SASB disclosures, he wrote. The different initiatives and systems of ESG disclosures include the Global Reporting Initiative, SASB, and more. The result is some confusion, said Ilham Kadri, CEO of Belgian chemicals company Solvay, during a Davos Agenda event. A lot of nonfinancial metrics are already being published, but the information is “rarely used by investors in a coherent way,” so having a new common standard could improve transparency and fuel progress, she said. “Measurement really converts intention into action,” said Anand Mahindra, chairman of the Mahindra Group. The tipping point for ESG and stakeholder capitalism is when people stop seeing it as a box to “tick off” but rather as essential for raising capital, he said. One effort to standardize metrics and create comparable disclosures has been led by the World Economic Forum’s International Business Council and the four largest global accounting firms. They released a set of 21 metrics in September that were recently adopted by 61 business leaders. These Stakeholder Capitalism Metrics aim to create a common framework to measure progress, ensure that resources are addressing global challenges, and accelerate progress toward a new system of capitalism that factors in more than just financial returns. Merging measurement systems into one standard will enable companies to “do work, rather than talking about measuring it,” said Bank of America CEO Brian Moynihan, who has been involved in the effort. It will also give investors, employees, and customers a way to hold businesses accountable, he said. The standards are very broad, but they are useful because they utilize data that Mahindra Group and other companies are already reporting, Mahindra said. But one standard for all public companies is not enough on its own, Fink argued during an Organisation for Economic Co-operation and Development event last week, calling for society, governments, cities, and private companies to make changes as well. Having separate systems for private and public companies creates a number of problems, he said. For example, public companies may choose to go private or look to sell off their “dirtiest” carbon businesses to private companies so they will be “judged better.” “We can’t discriminate against public companies,” he said. “Let’s be clear: This has to be done in concert with government, not just through capitalism. We can only play a small role in the totality of this.” To get there, governments need to move quickly to enforce disclosures, Fink said, adding that one of the biggest issues in the U.S. is that there isn’t yet a proper taxonomy for defining ESG or sustainability. “Measurement really converts intention into action.” --— Anand Mahindra, chairman, Mahindra Group The growth in demand for sustainable investment products, as well as trends in more sustainable and climate-related investing, has been spurred by some policy directives, including the European Union’s taxonomy for sustainable activities. This is helping define what is considered sustainable, officials at financial services company UBS said during a recent press conference. The push for ESG and sustainable investing is “not a fad,” and the market won’t “walk away from” the legitimate risk that these issues pose, one of the officials said. The “massive” increase in demand for sustainable investments hasn’t been matched by an equally strong increase in supply, which creates the risk that products will be sold as sustainable when they are not, necessitating standards and more attention to quality, a second UBS official said. The United Nations Development Programme has also been developing global standards through its SDG Impact initiative and has thus far designed standards for bonds, private equity, and enterprises. The goal is to create actionable guidance for internal management decision-making processes, said Elizabeth Boggs Davidsen, UNDP’s director for SDG Impact, during the OECD event. The effort aims to “drive needed consistency and comparability in the market to enable better informed decisions,” she said.