Governments, regulators and businesses should work together to improve the standard of environmental, social and governance (ESG) data for investors, according to the OECD.

As reported by our sister title, European Pensions, in its OECD Business and Finance Outlook 2020, the organisation stated that doing so would unlock the full potential of sustainable finance.

The OECD acknowledged that ESG investing has grown steadily in recent years, with ESG ratings, indices and other financial products proliferating to meet demand.

However, it warned that market participants across the board are still missing the relevant, comparable and verifiable ESG data they need to properly conduct due diligence, manage risks, measure outcomes, and align investments with sustainable, long-term value.

OECD secretary general, Angel Gurría, noted that finance has a “critical role” in aiding a “truly sustainable” recovery from the current coronavirus pandemic that will create better and greener jobs, boost income and lead to more sustainable and resilient growth.

“But finance can only deliver better environmental, social or governance outcomes if investors have the tools and information they need,” she warned.

The report 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. It stated that closed engagement between regulators and policymakers with the industry, including institutional investors and lenders, ratings and index providers, and international standard setters, will be critical.

Currently, the OECD said 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,” the report stated.

“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.”

Therefore, the OECD believes it is “urgent” that a common set of global principles and guidelines for consistent, comparable and verifiable ESG data is developed.

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