Appetite for these ‘ESG assets’, so-called for their environmental, social and governance credentials, has grown exponentially in recent years and has only accelerated during the Covid-19 pandemic.
As the financial sector will have to play a central role in the ecological transition – which can only be achieved through the proliferation of sustainable assets – its businesses need to invest with a long-term view and commit to shaping a more sustainable economic model.
In early 2020 global asset managers, including BlackRock, reaffirmed their intentions to do just that and prioritise sustainable investments. The move was encouraged by the world’s central banks, which are increasingly raising awareness of the financial instability inherent in climate and ecological risks.
A recent study* conducted by Mazars and OMFIF of 33 central banks and regulators revealed 70% of them consider climate change to be a major threat to global financial stability.
In France and the UK, major banks and insurance companies are set to undergo ‘stress tests’ to assess their resistance to the impact of climate change and the ecological transition (for example on fossil fuel investment.) Similar plans have been proposed in the US and Australia, among other countries.
The need for standardisation
If we want to achieve real change and ensure companies widely embrace the ESG goals, in particular for large companies that operate across several countries, there is a need for standardisation.
Although the standardisation of extra-financial information is business critical, organisations are being let down by a lack of consistency in ESG data and issues when accessing and using it.
Difficulties arise when defining, recognising and standardising the information because regulations differ from one country to another, while the sheer number of organisations involved in evaluation and scoring has blurred the lines on what range of data should be assessed. What’s more, the data can be expensive to produce and be of poor quality and, therefore, cannot be used for comparison purposes.
Role of audit firms
In this fog, audit and consultancy firms should play a role: building on their core competencies to prepare businesses and support them – in particular – in the creation and use of ESG standards. To create shared reference points, and make them globally and officially recognised, we must explore three main questions:
- How should we measure the green, socially responsible performance of an organisation?
- What are the key indicators of ESG success? What does good and great look like?
- Which certifications should be implemented to guarantee sufficient contribution to the ecological transition?
The financial sector has a clear responsibility to treat these questions as a matter of urgency because the current lack of reliable, comparable data acts as a barrier to advancing climate change resolution: investors struggle to identify where and what they should support because they find it hard to assess the adequacy of the issuer’s strategy to meet financial and ESG objectives.
Policy makers, regulators and supranational organisations, including the European Union, have an important part to play and need to work together to agree on the necessary reliability of the information and ensure it is of the same consistency and quality as financial data.
The standardisation of extra-financial data will constitute a great leap forward in its value to investors, businesses and others. It is, quite rightly, seen as ‘green gold’ waiting to be mined for the good of the ecological transition.
*Study “Fight against climate change: the role of banking regulation and supervision” by Mazars and OMFIF