ESG: Moving from agenda item to starting line

With the total assets held in sustainable funds set to reach USD53 trillion by 2025, businesses are quickly realising that integrating ESG into their organisations and investment strategies can give them a competitive edge.

Our latest Vistra 2030 report — which collects survey data from over 600 corporate and investment professionals — reveals that nearly three quarters of respondents (71 percent) think ESG will range from moderately important to extremely important as regards attracting customers over the next 12 months. Yet many organisations are unprepared.

One respondent said: “Businesses are saying [ESG] is on the agenda. They know they need to do something but they don't quite know where to start.”

ESG regulation on the rise

Despite the growing focus on ESG, businesses, fund managers and others are grappling with diverse reporting standards and guidelines. The differences make transparency elusive and create challenges for investors looking to compare performance.

ESG disclosures remain largely voluntary in most jurisdictions but regulators are fast moving in, particularly in Europe where high-profile regulatory frameworks, such as the EU’s Sustainable Finance Disclosure Regulation (SFDR), are emerging. 
 
More than half of our survey respondents (56 percent) expect ESG reporting requirements to become the global norm by 2027. A similar number (55 percent) say this would be positive for the fund and corporate services industry, rising to 65 percent among European respondents.

For many respondents, ESG is part of their daily dialogue: “Not a day goes by that we don’t have a conversation about ESG, either with a client or internally, to make sure we’re walking the walk. It is absolutely front and centre for almost every one of our clients.”

Spotlight on the EU’s SFDR

The SFDR is the most prominent and extensive piece of ESG regulation to date and has been designed to provide greater transparency, increase standardisation and enable investors to make better-informed decisions between service providers in relation to sustainability.
 
The regulation includes rules on how businesses classify investment vehicles, as well as additional measures on taxonomy, sustainability benchmarks and risk management. Correctly interpreting and implementing the SFDR will be key for business compliance and operations going forward.

It’s important to emphasise that while the SFDR is a ground-breaking directive, other jurisdictions are implementing or plan to implement ESG-related rules. The US Securities and Exchange Commission, for example, has proposed that public companies disclose information on the risks they face from climate change and how they plan to manage those risks. And APAC-based regulators are seeking to combat misleading ESG claims, or greenwashing.

Opportunities and challenges ahead

Our Vistra 2030 research reveals that businesses and investors welcome the move toward clearer reporting requirements as pressure to reduce carbon emissions increases. Regulations such as the EU Taxonomy and Taskforce on Climate Related Financial Disclosures (TCFD) should bring much-needed clarity to sustainable investments, including social impact bonds and green financing. A private equity specialist told us that the SFDR’s provisions for classifying funds based on sustainability levels have also helped. “That is exactly what the market needed,” he said.

But the emergence of new regulations and guidelines will present challenges. These will arise not only because of the potential complexity of new regulations — as demonstrated by the SFDR’s multifaceted requirements — but because of persistent regulatory divergence between jurisdictions. Businesses, family offices, fund managers and others operating across borders must address multiple applicable ESG standards and reporting requirements as they’re introduced and updated.

Getting ahead of the curve

The pressure is on for businesses and fund managers to develop ESG reporting strategies and practices that demonstrate sustainability impacts, the ROI of initiatives and transparency for investors. While there are numerous ESG reporting frameworks — and as we’ve noted most are voluntary — developing and implementing informed ESG strategies early on will position an organisation to meet future obligations. The process will also enable an organisation to support its own ESG declarations.

To be successful, ESG strategies must be developed by the board and effectively implemented by senior leadership with a solid governance framework to ensure transparency, accountability and compliance.

One important area to consider when getting started is data collection, management and analysis. Many companies and fund managers enter, track and report on benchmarks — across their organisations and global footprints — through a central ESG platform. Firms often underestimate the time it takes to initially identify if and where specific ESG data is stored, a process that we’ve seen lead to significant delays.

Organisations must also consider the costs of keeping abreast of and complying with changing ESG regulations and best practices. Given the time-consuming and costly nature of building in-house ESG management and reporting capabilities, many businesses are turning to fund and corporate services firms for advice, reporting technology and back-office services. Organisations should perform due diligence on any services provider, but given the risks and possible rewards, thoughtful expenditures in this area are now widely seen as an intelligent investment rather than necessary costs that don’t add value.

For more on ESG’s significance to global business and how businesses and investors are adapting to a new era of globalisation, download the Vistra 2030 report.