As part of an OECD Forum series, our Virtual Event “A Green COVID Recovery: the role of Finance” took place on Wednesday 30 September. Please note this event has now ended and registration is closed, but you can rewatch the session below and continue the conversation in our dedicated Forum Network room!
We will be discussing how finance can play a central role in ensuring a green and inclusive recovery by looking beyond traditional metrics, and focusing more on Environmental, Social, and Governance performance. With major economic recovery plans being adopted in response to the Covid-19 crisis, our societies are presented with an opportunity to help shape economic activity for decades to come. You can join us next Wednesday by registering here!
From the impact of human activity on climate change and biodiversity loss that has led to the emergence of COVID-19, to the Black Lives Matter Movement in the US and beyond, recent months have provided powerful reminders of the need to better reconcile economic performance with key societal, and environmental goals. The impact of the pandemic is underlining the tremendous human and economic costs resulting from insufficient attention paid to environmental degradation, and societal risks linked to high levels of inequality. In this way, the pandemic may serve as a turning point for ESG Investing: companies and financial actors alike must now look beyond traditional metrics, and focus more on Environmental, Social, and Governance performance.
From a niche market to a powerful economic force, ESG investing is rapidly becoming more mainstream. One might have expected this year’s dire economic conditions to push non-financial indicators to the backburner. However, the COVID-19 crisis has seen ESG funds outperform market alternatives. Combining profit with purpose is no longer regarded as a lofty goal: ESG is increasingly recognised as a more holistic risk management approach to enhance long-term value, while providing investing opportunities better aligned with societal norms.
More on the Forum Network: A Future in the Balance: Will the recovery be Green? by Philippe Lamberts, MEP
For many observers, the fact that societal and environmental benefits go hand-in-hand with robust financial performance will not come as a surprise. Companies with high scores in ESG criteria tend to exhibit greater resilience thanks to better corporate governance and greater visibility over their supply chains. Furthermore, increasingly today’s workforce expects to work for a company with a positive societal impact.
Yet, fostering the rise of ESG investing requires addressing remaining hurdles and limitations. Firstly, it is important to note that the lack of common methodologies, performance metrics and product structures for ESG markets remains a significant roadblock. For investments, assessed using ESG criteria to be attractive, investors must have sufficient visibility over both financial and extra-financial performance. The absence of a common, internationally accepted framework hinders the potential of finance in driving positive societal and environmental outcomes. While some ESG products advertise both improved returns and alignment with societal impact, the combination of disparate and incomparable metrics falls short of either objective. Therefore, greater clarity on terminology and alignment with long-term financial materiality is urgently needed to strengthen the resilience of sustainable finance. New OECD work will help address these challenges, through a framework and policy guidance for effective ESG practices.
Finance stands to play a central role in ensuring a green and inclusive recovery. Leveraging private investment is critical to the transition to a low-carbon, fairer and more equal economy.
Moreover, reliable data is often insufficient, or difficult to provide. Whilst CO2 emissions may serve as an acceptable indicator of a company’s performance on the climate front, forthcoming OECD research finds, for instance, that a high rating under the “Environmental” pillar of an ESG rating does not necessarily translate into lower carbon emissions. Furthermore, the “E” of ESG refers to more than addressing global warming. Safeguarding biodiversity is increasingly recognised as critical, including with respect to carbon storage. Yet, effective performance measurement in this respect remains elusive, allowing faulty nature-based carbon absorption projects to flourish. In the same way, a recent scandal over working conditions in the UK garment industry highlighted the difficulty of obtaining reliable data on ill-defined social criteria. Without a common agreed framework, and data on effective ESG practices, convincing investors of the benefits of ESG investing is bound to remain a difficult endeavour.
The momentum is clear. In August 2019, the US Business Roundtable, a prominent association of CEOs, released its new Statement on the Purpose of a Corporation, committing to lead companies for the benefit of all stakeholders. The substantial financial support provided to the private sector in the midst of the COVID-19 crisis – ultimately funded with taxpayers’ money – has further paved the way to heightened public expectations towards resolute action. With major economic recovery plans being adopted in response to the COVID-19 crisis, our societies are now presented with an opportunity to help shape economic activity for the decades to come. Finance stands to play a central role in ensuring a green and inclusive recovery. Leveraging private investment is critical to the transition to a low-carbon, fairer and more equal economy. To help the sector rise to the challenge and embrace ESG investing for more sustainable and inclusive growth, all stakeholders must urgently work together to address the obstacles standing in its way.
Please note this event has now ended and registration is closed, but you can rewatch the session below and continue the conversation in our dedicated Forum Network room!
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