Issue #1
To regulate or not to regulate ESG?
Today, I stumble on two surveys that got me thinking: The CFA Institute’s latest survey of its members on ESG matters can be found here. It mentions that around 80% of us, CFA Charterholders, think ESG integration should not be mandated by regulators. It is amazing how little we have achieved for the planet and overall society over the last 20 years of “sustainable investing”! Clearly, we cannot do it without a strong “nudge” from regulators... Why?
Most of our ratings and methods still revolve around “financial materiality”. That means we look at the impact of the environment on the financial health of corporations rather than the other way around: how is the corporate hurting the world?
And by doing so, we are lying to ourselves and the larger public when we say we are investing for a better world.
Double materiality, or dual materiality, means looking at impacts both ways. Maybe it is what we should all be looking at? But unfortunately, it is a lot more complex to implement... and may not bring more customers.
In one of his recent ESG on a Sunday newsletter, Sasja Beslik mentioned a study that found that environmentalists are not more likely to hold pro-environment investments. This is amazing and one of the main reasons seems to be financial literacy. We need to speak with simple and comprehensible words!
Even those who would want their investments to make a difference cannot find the right products in this financial jungle full of mumble-jumble acronyms.
So, back to regulations. After all, most are focused on clarifying disclosures. Are we afraid of regulations just because they would force us to do the right thing? I do not think it can be that simple. The Edelman Trust Barometer indicates that around 80% of investors believe companies frequently overstate or exaggerate their ESG progress when disclosing results. Clearly, there is a damaging lack of trust and I hope this is the reason why professional investors fear regulations and the accompanying responsibility.
In this sense, the strong regulatory push in Europe will be very interesting to follow. From the European Union Taxonomy to the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosure Regulation (SFDR), the European framework will impact everybody. Yes, it is far from perfect.
But maybe we can improve our practice with time and, maybe, we can avoid the worst of the climate scenarios for our common good.
On a more personal note, I am starting this newsletter as a way to force myself to structure my thoughts through writing, but also to engage in a conversation around the topics of sustainable finance, ESG and impact investing. Please share your comments, ideas or questions!
As usual, this letter, originally published on LinkedIn, is meant to open a discussion: join it here.
Lenny Kessler