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There is a risk that ESG becomes a tick box or greenwashing exercise, rather than a lens through which we can understand real-world business risks and opportunities. The rush to simplify and commoditise ESG means underlying business drivers and value creation levers can be lost.
Globally, ESG disclosure frameworks increasingly provide some form of standardisation and comparability. But companies increasingly need to disclose robust evidence to support their claims and build credibility.
In addition, there is a shift towards external assurance, with prime examples being the PRA’s scrutiny of the CBES submission in the UK, the SEC proposals for climate risk disclosures for 2023, and the disclosure requirements embedded in the EU CSRD. Eventually this drive is likely to lead to a requirement for external assurance. ESG disclosures must increasingly be supported by robust evidence tracking to support claims. In fact, Morningstar removed more than 1,200 funds with a combined $1.4tn in assets from its European sustainable investment list as they didn’t have sufficient evidence to support their inclusion.
Credibility in ESG programmes will only be built when real world value is achieved through implementing ESG initiatives. The Sustainable Development Goals will not be achieved simply through disclosing alignment. Instead, organisations need to focus on credible outcome metrics which gives stakeholders confidence that real-world societal outcomes are being achieved, such as. gender diversity, maintaining biodiversity, and reduced poverty.
To build credibility, it is essential to determine the key ESG elements that are really important your business strategy and communicate it transparently. This will enable financial institutions to demonstrate both the commercial rationale and the impact on the planet and society. This is the route to differentiated value.
