Policy must move fast and fix things

Sustainable disclosure regulations propagate (and diverge); index influence amplifies corporate failings; ESG derivatives come under fire. Plus, what do Facebook and ESG have in common?

View from the top

🗽 The Biden administration has unveiled a strategy to “measure, disclose, manage and mitigate the [financial and economic] systemic risks climate change poses.” Congressional opposition, however, could undermine the US’s role at COP26.

💂 Across the pond, HM Treasury released its own roadmap. ‘Greening Finance: A Roadmap to Sustainable Investing’, details an anti-greenwashing package of new sustainability-related disclosure requirements for UK businesses and investors.

📊 The report notes ESG data providers may be brought under the remit of the FCA in a bid to improve transparency and data discrepancy. Assessments “may not always be comparable,” as “gaps and assumptions” make data susceptible to greenwashing.

🗺️ After years of too few rules dictating what constitutes a sustainable investment, there may now be too many. More than 30 taxonomies are in the works, reports Reuters, each reflecting national idiosyncrasies that may jar with a global market.

🔀 Regional disparities are ‘worrying’, according to the latest H&K Responsible Investment Brand Index. In particular, the study points to differences between European investors and their North American and Asian counterparts.

🌐 While the UK intends to “diverge from the EU,” ESG Investor notes both are united in taking a double materiality approach to reporting. The US, however, is unlikely to go beyond enterprise value with its own disclosure framework this month.

🔬 The global regulatory froth is a reaction to the ESG boom, says the FT. On the plus side, an overdue ladle of scepticism and scrutiny is a good indicator that the industry is finally growing up. But co-ordinating policy could—should—be the next step.

🧑‍⚖️ All these targets and regulations are creating demand for legal expertise, reports the FT. Lawyers are racing to catch up with the financial sector’s embrace of ESG, as companies seek advice on M&A, supply chains and—interestingly—social media.

💸 As banks start experimenting with complex ESG derivatives, ESMA warns claims of positive impact “cannot be substantiated,” adding standardised criteria should be met before firms can add ESG tags to forwards, options and swaps. One to watch.


Util in the news

📰 MSCI's Net-Zero Tracker study draws viable conclusions about the environmental footprint of index companies—but what of the thousands of allocation decisions and trillions of assets that amplify their failures? Util CEO Patrick Wood Uribe spoke to the FT about the real picture behind headline figures and benchmark performance.

🎙️ Patrick joined Helee Lev and Ryan Nelson on The ESG Experience podcast to discuss influences and trends that will affect the sustainable investment landscape in 2022. Topics include lingering effects of COVID-19, ESG growth, new US disclosure requirements, risks surrounding ESG-related litigation, and more.

📥 Util research concludes ESG is "unfit for purpose" with an absence of coherent regulation or consensus leading to a "perfect storm for greenwashing,” reports Environment Analyst. “The report’s findings include an observed lack of measurable positive impact in terms of the SDGs from ESG funds.”

✍️ The biggest takeaway from greenflation? Financial and ‘extra-financial’ factors are inextricably linked. Writing in the WealthNet, we argue a hardline, siloed, Greta or Gekko approach to the energy transition will hinder environmental, social and economic progress. It’s time for better coordination.


Policy must move fast and fix things

Can capital markets drive positive progress in the absence of negative reinforcement? If your revenue (or assets) rival the GDP of a small country, and you’re in command of a metaverse (or metaeconomy), the answer is: probably not.

An international regulation race

Just as COP26 draws international capital markets together, climate and ESG regulation appears to be dividing them. The recent barrage of regulatory activity on both sides of the Atlantic, while welcome (and overdue), is notably uncoordinated.

On one end of the spectrum, there’s the US SEC, which delivers its sustainable disclosure framework this month. Based around SASB, it’s likely to focus solely on enterprise value (that is, the impact of social and environmental factors on a company rather than the other way around). On the other end of the spectrum sits the EU, whose European Commission is in the process of wrapping up a sustainable finance taxonomy that defines which economic activities can be labelled a sustainable investment based on their adherence to strict environmental criteria.

The UK, which just released a package of sustainability related disclosure requirements, helpfully stated it intends to “diverge from the EU,” though it, too, is taking a double materiality approach to reporting guidelines (i.e. looking at the impact of a company on social and environmental factors).

ESG fund managers pass the baton

For years, there were too few rules dictating what constituted a sustainable investment. ESG was integrated and marketed with impunity—all upside, no downside—culminating in August’s watershed DWS probe and immediate backlash.

Capital markets, the reasoning goes, can’t regulate themselves, and investors shouldn’t be held entirely responsible for righting the world’s wrongs. Regulators and politicians ought to step up. And so they have.

The result is a lot of rules. More than 30 definitions of green investment are being developed, reports Reuters, each reflecting national idiosyncrasies that may jar with a global capital market. In that sense, even now, regulators are playing catch up.

As Mirova CEO Jens Peers told the FT, “One of the questions that the SEC has right now for asset managers [is] how we see things in a global context. The industry wants to avoid having different rules in different parts of the world [but] I see no evidence of regulators co-ordinating policies.”

Big Tech’s Big Oil moment

Two weeks ago, the house of cards came down on Facebook when a series of investigative reports by the Wall Street Journal detailed how the social media giant bent the rules for celebrity users, allowed anti-vaccination misinformation to proliferate and held back internal research that showed its influence on teen suicide.

It was a wake-up call for ESG investors, for whom tech has traditionally been an obvious bedfellow.

According to our latest research, based on all US-domiciled funds, Microsoft, Apple, Amazon and Google parent company Alphabet are the top-four holdings of both sustainable and non-sustainable funds, accounting for around 10% of both groups. In terms of sector exposure, around a quarter of each sits within technology; in terms of industry, the sustainable fund group is 18% exposed to software and services, the non-sustainable fund group, 16%.

Admittedly, the F trails the AAMGs, accounting for 0.67% and 1.33% of sustainable and non-sustainable fund group holdings, respectively. And no wonder: relative to its Big Tech peers, the firm has come under frequent shareholder and regulatory fire.

But. To examine Facebook Files in silo, without considering the broader implications for the tech industry, is akin to looking at DWS in silo, without considering the broader implications for the ESG industry.

More than one commonality

Like ESG funds, tech companies grew fast and without much regulatory oversight. Like ESG, tech sits at the vanguard of a new, progressive type of economy. And, like fund managers, business leaders find themselves in a role that traditionally sat outside capital markets (in the public eye, at least): that of geopolitical actors.

Just as greenwashing doesn’t demolish the case for sustainable investing, nor do controversies around, say, misinformation and data privacy undermine the case for Big Tech. In theory, both are burgeoning industries that offer the promise of social equity and environmental security (as evidenced by the chart below, which shows the degree to which software contributes to the 17 Sustainable Development Goals).

Their failures should, however, serve as a reminder that no individual company is inherently good—certainly not without direction. If a capital market player happens to be sitting on assets or revenue that rival the GDP of a small country, governing nascent metaeconomies or metaverses, it stands to reason that it should be held to high standards. And, seeing as the capital market is a global one, those standards should probably be global.

Policy and regulation must move fast and fix things.

Ironically, it’s in Big Tech that investors and regulators will find the very tools they need—in the form of innovations such as big data and AI, and possibly even blockchain—to set those standards and follow the money.