ESG reporting and ratings need to be standardised and enforced properly to help consumers and investors understand the sustainability credentials of companies and investment products, experts have said.
Giving evidence to the business, energy and industrial strategy committee yesterday (October 11), Emma Wall, head of investment analysis and research at Hargreaves Lansdown, said availability of information to assist consumers and investors is key when it comes to sustainability data and corporate reporting.
“Availability of information to consumers to investors, be it a standardised annual report, [or] on your website, standardised language and reporting would be a huge help.”
This would also assist in making it easier to compare large companies, with huge reporting capacity, with SMEs.
“When we’re considering whether a business is good on ESG factors, looking at a huge financial services employer like BlackRock, for example, we are holding them to a different standard than we might do a small boutique asset manager who has a hundredth of the employees and disposable income.”
A spokesperson for the FCA said it has made it a priority to ensure investors are given "clear and reliable" information about ESG products.
"This includes considering where new rules are needed as well as communicating specific expectations on the design, delivery and disclosure of ESG funds under our existing rules.
"We actively monitor this sector and will respond where we see serious misconduct.”
Wall also focused on the need for ratings agencies to conform to standardisation.
“You can see [the same] firms with widely different [ratings] outcomes” she said, because of the qualitative overlay that goes into a rating.
Aneesh Raghunandan, assistant professor of accounting at the London School of Economics said this comes down to the issue of dimensionality.
“There are so many things you’re trying to agglomerate into under one roof [in a rating]…it’s just hard to do.”
Instead of measuring companies on an overall ESG rating, it might be better to split the three terms out, he added.
Raghunandan gave the example of an investor who wants to pick low carbon firms, if picking ESG funds that investor will then have to try and identify which are carbon friendly.
“Splitting [the E, S and G] can make it easier to understand."
Underlying the effectiveness of all of this is the effectiveness of regulatory enforcement, Raghunandan said.
“In order for any regulation whatsoever to have any impact, you need companies to comply.
“In order for compliance to happen there needs to be a credible threat of enforcement for non-compliance.”
He said this should be focused on inaccurate filing, and not just late filing.
“[The focus should be] not so much on the need for more regulation, but on the need to take existing regulation seriously.”
