Good things are happening in the land of ESG. Aspects of the European Commission’s sustainable finance action plan regulation have certainly been frustrating, but the sustainable finance disclosure regulation (SFDR), for example, does look like it could end up having a beneficial effect, even though there are still problems associated with it and the effect is perhaps not the one that was envisaged for the SFDR.

EU and UK rulemakers are taking steps to ensure coordinated information flow along the investment chain, so pension funds are not left with disclosure obligations without the information they need. The sequencing may not be ideal, but the message seems to be sinking in.

Separately, a more honest, helpful framing is emerging that better reflects what, in my opinion, was the original ultimate intention behind what has become known as ESG: to make the world a better place.

The PRI’s strategy for the three years to 2024 is about “building a bridge between financial risk and real-world outcomes”. This feels more helpful than sticking to a narrative focused on integration of ESG factors for enhanced financial performance, or alpha.

One of the projects the PRI has on the go is ‘A legal framework for impact’, which aims to assess the extent to which legal frameworks currently enable or impede a shift in investor focus to the sustainability impact of investment decision-making – as distinct from sustainability-related inputs to investment decision-making.

Where legal impediments to incorporating sustainability impact in investment decision-making are found, the project is to make recommendations for policy change.

ESG - progress but still much road to travel

Although no-one may be advocating that investors become ‘substitute policymakers’, I do find moves to facilitate and/or demand more real world outcomes-focused activism from them to be unsettling. I admit to including the PRI initiative in this.

At least it should be acknowledged that there may be legitimate questions to explore about the inter-relationship with democracy, whatever the findings may be. I want governments to legislate rather than have everything left up to investors.

But still, the PRI’s ‘A legal framework for impact’ project is welcome because it is transparent and more authentic than prior work on fiduciary duty to incorporate financially material ESG factors.

There is much more to be done, though, before we get to a better place in terms of communication and promotion with regard to ESG. Think tank 2° Investing Initiative, for example, has suggested the SFDR could create confusion if market participants believe they can rely on it to market their product as having a real-world impact.

And in a blog on his ‘Grow the Pie’ website, Alex Edmans, professor of finance at London Business School, looks at recent coverage of, and reactions to, a study on ESG strategies and outperformance, saying the study shows we should not react to research based on emotion.

“We should apply the same scepticism to a study that reinforces our view of the world as one that contradicts it, and have the same openness to a study that finds an ‘inconvenient truth’ to one that supports what we would like to be true,” wrote Edmans. 

Susanna Rust, Deputy Editor, Online