Regulatory shifts driving ESG uptake in Europe

Environment Council Roundtable

Regulatory developments is the key factor driving the uptake of environmental, social and governance (ESG) investing, according to a survey conducted by State Street Global Advisors (SSGA), while the lack of reliable data is the top barrier to deeper ESG.

The research, entitled Into the Mainstream: ESG at the Tipping Point, which surveyed investors at over 300 institutions, found 52% of European investors cited getting ahead of regulation is the key reason why they are adopting ESG.

This was closely followed by mitigating ESG risks and avoiding reputational risk which were highlighted by 45% and 39%, respectively.

Respondents said the frameworks having the biggest impact on their ESG approach was domestic regulation (57%) and the Global Reporting Initiative (52%).

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The report added the global regulatory environment is developing very quickly with a number of countries already introducing ESG requirements.

In Europe, the EU Commission introduced new disclosure requirements earlier this year related to sustainable investments. The regulation was implemented around three pillars; the elimination of greenwashing, regulatory neutrality and a level playing field for all investors.

Furthermore, the Commission has also agreed to introduce new standards on climate change through the launch of two climate benchmarks; the EU Climate Transition benchmark and the EU Paris-aligned benchmark.

Carlo Funk, head of ESG investment strategy, EMEA, at SSGA, commented: “The research results confirm what we’re hearing from our clients. The regulatory environment is clearly driving institutional investors towards a sea-change in ESG practices.

“Over the past year most of our clients have explored what they can do about their portfolios’ carbon profiles and climate-related risks.”

Globally, getting ahead of regulation and viewing ESG as a fiduciary duty were the top factors for adopting ESG scoring 46% while mitigating ESG risks was highlighted by 44% of respondents.

Rakhi Kumar, head of ESG investments and asset stewardship at SSGA, said: “That fiduciary duty was cited so highly marks a significant development since many investors previously struggled with whether ESG adoption runs contrary to their fiduciary objectives. Alongside regulation, this is now a major driver of ESG implementation.”

ESG is a data miners’ dream

However, there are also a number of factors halting this adoption. Nearly half (44%) of respondents bemoaned a lack of reliable ESG data while 43% said they experienced internal resource constraints.

Furthermore, some 40% said there is a lack of expertise to integrate ESG factors while 38% said ESG could compromise maximum returns.

The lack of standardisation across ESG providers’ data has been a major challenge for investors and one the industry has been slow at addressing.

For example, MSCI and Sustainalytics, the two most widely used ESG data providers, have a correlation of just 0.53 on their ESG scores.

“These differing methodologies have implications for investors,” the report said. “In choosing a particular provider, investors are, in effect, aligning themselves with that company’s ESG investment philosophy in terms of data acquisition, materiality, aggregation and weighting.

“By relying on an ESG data provider’s score, asset owners are taking on the perspectives of that provider without a full understanding of how the provider arrived at those conclusions.”

Photo: EU Environment Council Roundtable (04/10/19) Credit: European Union

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