“Finance has a critical role to play in ensuring a truly sustainable recovery from the COVID-19 crisis that will create better and greener jobs, boost income and lead to more sustainable and resilient growth,” said OECD Secretary-General Angel Gurría, writes the OECD.
“But finance can only deliver better environmental, social or governance outcomes if investors have the tools and information they need.”The Outlook highlights a number of challenges with current ESG-based investment and finance strategies that need to be fixed to support markets in building back better. Close engagement on the part of regulators and policymakers with the industry, including institutional investors and lenders, ratings and index providers, and international standard setters, will be critical.The different methodologies used vary in scope and tend to have low transparency, with few generally accepted, consistent, comparable and verifiable indicators on which to base assessments.
In practice, this means that a company might achieve a high ESG score from one service provider, and a much lower score from another.This fragmentation and lack of comparability means investors cannot properly assess companies’ performance on ESG-related investment goals, such as limiting exposure to carbon emissions. This means that current practices cannot be relied on to manage climate transition risks and to green the financial system, at a time when these are rising priorities for investors and policymakers alike.Fragmented ESG frameworks and inconsistent disclosure requirements also mean that both institutional investors and corporates cannot properly communicate on their ESG-related decisions, strategies and performance criteria, with beneficiaries and shareholders.
This in turn makes it hard for such beneficiaries to assess how their savings are used, and for companies to attract financing at a competitive cost that fully considers ESG factors.Market supervisors have a big role to play by encouraging greater relevance and clarity in reporting frameworks for ESG disclosures. This includes transparency on how metrics are calculated, weighted and interpreted in the assessments of ESG performance.The report also highlights other priorities for boosting ESG investing.
These include putting in place guidelines to enable banks to scale up ESG integration and due diligence in their lending; the role state enterprise ownership should play in driving better ESG outcomes; and ensuring fiduciaries such as asset managers and boards better manage material ESG risk, including when investments are exposed to longer-term sustainability risks, as in the case of infrastructure financing..
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