As previously seen on Skytop Strategies and published with permission.
Many of us in the ESG (Environment, Social, Governance) space, have dreamed of the day when governments would start to set rules about sustainability reporting. We have hoped to see more pressure on companies to fully and consistently tell their stories. Over the past few months, our dreams have started to come true. However, we now realize we may be dealing with a nightmare!
The EU has published both rules on what companies must report (the Sustainable Finance Disclosure Regulation or SFDR) and 161 pages of fun reading on how these rules will affect investment firms. Parts of this “EU Taxonomy” standard will go into effect in January.* Firms that want to claim they are investing in a sustainable manner must decide whether they are satisfying Article 8, Article 9 or both. (I won’t bother trying to explain these articles—you can try to puzzle them out for yourself!). They also have to show their practices “do no significant harm” (referred to commonly with yet another acronym, as “DNSH”).
As an added complexity, the UK is doing its own version of the SFDR (called the SDR). It isn’t clear how firms that operate in both the EU and the UK will harmonize the differences in these rules. In the US, we have changes in the Department of Labor (DOL) default investment guidelines and in the Securities and Exchange Commission (SEC) proxy proposals. Both will affect investment firms that seek to be ESG-oriented.
Our friends at Arabesque have published a report listing a number of Asian ESG regulatory updates. OMFIF has documented sustainable investment policies now in 13 of 23 African countries. All of these regulations may include bits and pieces from the alphabet soup of standards we are used to referring to (the UN SDGs, CDP, the GRI’s GSSB, standards from the Value Reporting Foundation—a combination of SASB and the IIRC, the TCFD, etc.). However, the new regulations often “innovate” and set out their own approach to reporting.
Investment firms probably have to choose from three somewhat uncomfortable alternatives:
Lead the way. There may be a marketing advantage to being one of the first investment groups to “comply” with the new rules. Unfortunately, there is also a chance that regulators will closely read the first few documents they receive—and criticize them. (Our friends at Polar Capital have taken this route.)
Wait a bit. Yes, some of the rules are already in place or are supposed to be complied with soon. But, there are few clear risks from waiting. Most of the new regulations don’t come with strong enforcement plans or big fines. Investment groups in this camp have started preparing to report, but want more clarity before they take their first step.
Head in the sand. A surprisingly large number of investment groups seem unaware of or unconcerned about the new rules. Some may feel a change in government policy—or public opinion—can shift attention away from the issues the new rules seek to address. Some may not care if they don’t appear to be ESG oriented.
Those of us who provide tools and data to investment firms are busy figuring out ways to help with all three reactions. CSRHub provides solutions for ESG reporting through our subscription based tools and also with ESGHub, our App on the Bloomberg terminal. We can’t give definitive answers on topics that remain cloudy, but we believe our tools can help investment firms get started with EU reporting. Waking up and responding is better than snoozing and having scary dreams about the new market reality.
* Per the latest report we have seen, the EU Taxonomy Regulation will take effect as follows:
1 January 2022: for the environmental objectives of climate change mitigation and climate change adaptation
1 January 2023: other environmental objectives (sustainable use and protection of water and marine resources; the transition to a circular economy; pollution prevention and control; and the protection and restoration of biodiversity and ecosystems)
Bahar Gidwani is CTO and Co-founder of CSRHub. He has built and run large technology-based businesses for many years. Bahar holds a CFA, worked on Wall Street with Kidder, Peabody, and with McKinsey & Co. Bahar has consulted to a number of major companies and currently serves on the board of several software and Web companies. He has an MBA from Harvard Business School and an undergraduate degree in physics and astronomy. He plays bridge, races sailboats, and is based in New York City.
CSRHub offers one of the world’s broadest and most consistent set of Environment, Social, and Governance (ESG) ratings, covering 45,000 companies. Its Big Data algorithm combines millions of data points on ESG performance from hundreds of sources, including leading ESG analyst raters, to produce consensus scores on all aspects of corporate social responsibility and sustainability. CSRHub ratings can be used to drive corporate, investor and consumer decisions. For more information, visit www.CSRHub.com. CSRHub is a B Corporation.