Harnessing ESG Investing for a Green COVID Recovery

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Combining profit with purpose can no longer be just a lofty goal. From the impact of human activity on nature, which created fertile ground for the emergence of COVID-19, to the very high levels of inequality, both further exposed and magnified by the pandemic, recent months have provided a powerful reminder of the need to better reconcile economic performance with key environmental and societal goals.

The OECD Forum virtual events on employment (10 July) and education (3 September)  in our pandemic stricken times made clear that we may all be “facing the same storm, but that we are not all in the same boat”. Yet, they have also provided an indication of how we could best go about turning the tide to shape a more inclusive future of work, and reinvent schooling for the 21st century. In the same vein, the massive recovery plans adopted in response to COVID-19 offer a unique opportunity to help shape our societies and economies for decades to come.

Timed to coincide with the release of the OECD Business and Finance Outlook 2020 — Sustainable and Resilient Finance, our Forum virtual event “A Green COVID Recovery: the Role of Finance” (30 September) explored why the pandemic must serve as a turning point for ESG Investing, delving into the remaining hurdles to address to ensure that finance plays a critical role in the transition to a fair, healthy and green economy and society.

Replay: Watch in full the OECD Forum virtual event "A Green COVID Recovery: The Role of Finance"

Check out the Forum Network's dedicated Room for more on Green Finance, a place for members to continue the discussion started at the OECD Forum event. 

The Rise of ESG Investing and its (Current) Limits

Environmental, Social and Governance (ESG) investing has become too big to ignore. My colleague Greg Medcraft, OECD Director for Financial and Enterprise Affairs, underlined there is a growing realisation across all market participants that non-financial sustainability risks have a substantial impact on long-term value. The COVID-19 crisis has seen ESG funds outperform market alternatives, with ESG guiding asset decisions, and fiduciaries increasingly incorporating sustainability considerations to meet their duty to their investors. In turn, firms have grown acutely aware of the rising expectations regarding their social license to operate. A growing number of prominent CEOs are reaching beyond their comfort zones, taking on issues far beyond their core business responsibilities.

It is no longer possible to view economic activity in a social or environmental vacuum. In an age of radical uncertainty, the fact that societal and environmental benefits go hand-in-hand with robust financial performance thus hardly comes as a surprise. Companies with high scores in ESG criteria tend to exhibit greater resilience due to better corporate governance and greater visibility over their supply chains. Furthermore, consumers can now instantly inform themselves about a company’s social position and environmental performance, and weigh up whether or not they align with their values. Today’s workforce also increasingly expects to work for a company with a positive societal impact, and strong corporate purpose further serves as a powerful way to motivate employees towards collective success. 

However, all that glisters is not gold. The ‘social license to operate’ (SLTO) has left its legal equivalent trailing in its wake with current ESG practices still falling short. Data on ESG performance abounds, but it remains inconsistent: a company’s ESG score can greatly vary depending on the methodologies and ratings used to assess performance. Our analysis of ESG reveals that a company could very well retain a high ESG score whilst failing to meaningfully tackle its carbon emissions! As Sharan Burrow, General Secretary of the International Trade Union Confederation (ITUC) put it, the ESG framework cannot be allowed to serve as just another PR tool. In order to address green or social “washing” concerns and build trust, we must strengthen the regulatory environment, and ensure greater transparency and standardisation of core elements of ESG data disclosure and measurement.

Just released: Developing Sustainable Finance Definitions and Taxonomies

This report maps sustainable finance definitions and taxonomies in five jurisdictions. It also identifies preliminary taxonomy design considerations to help policy makers develop and grow sustainable finance markets to help achieve environmental and sustainable development goals.

Making ESG Fit for Purpose: The Need for a Clear and Globally Mandated Common Framework

Of course, measurement is often easier said than done. For one, the “E” of ESG is not the same as the “C”: it goes beyond climate, to encompass other environmental dimensions - such as a company’s impact on ecosystems and biodiversity - for which there are no clear metrics. But as Anthony Cox, OECD Deputy Director for the Environment, put it,  we simply do not have the luxury to wait for perfect data. Instead, we must identify strategic data demands, harness new types of data becoming available thanks to digitalisation, and offer a clear framework with multiple entry points. In this respect, the OECD Better Life Index an interactive tool that allows you to see how countries perform according to the importance you give to each of 11 topics that make for a better life could serve as an inspiration.

Considering the international nature of finance, it is also essential to ensure comparability and consistency across borders and jurisdictions. A globally mandated and auditable ESG data-reporting framework should therefore be our aspiration. Jean-Jacques Barbéris, Director of ESG at Amundi, Europe’s largest asset manager, pointed out that data is never neutral, citing the importance of a regulatory framework setting the parameters used to measure performance. Conscious of the strong demand for ESG investment and need to maintain momentum, he urged organisations such as the OECD, to draw further on their convening power and capacity to build bridges between different approaches, and play a key role in allowing ESG to realise on its potential.

Towards a Green COVID Recovery: Enabling ESG Investing to Rise to the Challenge

Time is clearly of the essence. The COVID-19 Crisis requires extraordinary measures for such extraordinary times. The opportunity to realise the dream of a Green Recovery that we failed to grasp in the aftermath of the Global Financial Crisis has come around again. An overhauled global framework for ESG based on proper regulatory guidance, enhanced and improved data and monitoring could well be the key to finally delivering on an ambition shared by companies, the market, citizens, and governments alike.

Also on the Forum Network: One World: Global solidarity for recovery and resilience by Sharan Burrow, General Secretary, ITUC

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1 Comment

Go to the profile of Paul Gibbon
Paul Gibbon 17 days ago

- excellent article