Sustainable finance has seen tremendous growth in recent years. But the field, which has been identified by the government as a potential future financial services niche for Cayman, is still beset by data problems that need to be overcome for sustainable investments to take full effect.
According to the OECD Business and Finance Outlook 2020, the proliferation of indices and ratings in environmental, social and governance (ESG) investing in response to greater demand is slightly misleading.
Market participants 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.
The report points to several issues with current ESG-based investment and finance strategies that need to be addressed to support markets.
The various methodologies used to analyse sustainable investments vary in scope and have little transparency. This lack of verifiable indicators that are widely accepted, consistent and comparable means in practice that a company may receive a high ESG score from one service provider but a much lower one from another.
As a result of this fragmentation, investors cannot properly assess a company in terms of ESG-related investment objectives, such as lowering 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 OECD said.
Fragmented ESG frameworks and inconsistent disclosure requirements also mean that both institutional investors and companies cannot properly communicate with investors and shareholders about their ESG-related decisions, strategies and performance criteria.
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.
“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 in a press release. “But finance can only deliver better environmental, social or governance outcomes if investors have the tools and information they need.”
The report said it will be critical for regulators and policymakers to closely engage with industry members, including institutional investors and lenders, ratings and index providers, and international standard setters.
In particular, market supervisors had 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.
Most urgent, according to the report, is the development of a common set of global principles and guidelines for consistent, comparable and verifiable ESG data.
The Business and Finance Outlook calls for guidelines to enable banks to scale up ESG integration and due diligence in their lending and it points to the role state enterprise ownership should play in driving better ESG outcomes.