The past year was a pivotal one for ESG, with bold new regulations and political challenges emerging for market participants. But the biggest change may have come from financial institutions themselves as they signalled that sustainability had become fully embedded within their operations.
No longer is ESG seen as simply an onerous obligation, it’s now regarded as a huge opportunity and is being woven into the very fabric of Europe’s economy, argued Sabine Dittrich, head of EU financial regulation at Slaughter and May.“Financial institutions are seeing ESG as a real opportunity as something that they want to develop and I think they are getting serious about how to embed ESG in their own DNA, in their strategy and in their corporate governance,” Dittrich told A-Team ESG Insight’s ESG Data and Tech Summit London. “That goes far beyond just being compliant. ESG goes into everything that they’re thinking about, and I think that’s a major change.”
A Year of Transformation
The change in institutions’ outlook towards ESG was just one of a number of major transformations that made 2022 an important year for sustainability. In a deep-dive discussion that opened the second annual summit, the former UBS regulations chief said that the compliance landscape for ESG had also radically changed as the US had published its proposals for climate-related reporting, the UK had outlined plans for sustainable finance disclosures and the European Union had tinkered with its Sustainable Finance Disclosure Regulation (SFDR).
The focus among all parties in ESG – institutions, regulators and investors – had clearly been on battling greenwashing last year. With so much energy invested in getting ESG right, there is now a greater likelihood that the scourge can be eliminated, she Dittrich said.
“There’s now more caution in the way that they interpret their own products – they want to be safe, so they are now leveraging the data that’s out there and trying not to overpromise.”
Concern about greenwashing had been elevated during the year as politicians in the US began a campaign to demonise sustainable investing and sought to legislate against it. There had been disquiet over the US and UK’s apparent procrastination on creating suitable regulations, but Dittrich said officials had used the time to study the experience of existing rules in the EU to identify the best and worst pieces of legislation.
The UK’s Financial Conduct Authority, in particular, appeared to have looked at the EU Taxonomy and SFDR and wondered whether it was worth diverging from the precedent they had set, Dittrich said. That was most apparent on the subject of fund labels, on which the FCA had come up with proposals that differ from the EU’s rigid classification.
The EU Taxonomy and SFDR support the principle of labelling funds as fully green, partially green and non-green, depending on the amount of sustainability-liked assets they contain. With the possible threat of greenwashing accusations looming over asset managers that had wrongly labelled their funds, many downgraded their classifications last year. The move added to growing concern that the EU hadn’t properly thought out its regulations.
“The industry – and the FCA apparently – thinks that some decisions that had been made on the EU level were not the most optimal positions to be taken,” Dittrich said. “It’s a complex framework.”
Time to Assess
The next couple of years could be a time of reflection and consolidation by regulators and governments, Dittrich said. With elections in the US and the UK providing a likely pause in the passage of new legislation, the time could be used to assess how effectively laws so far enacted are working.
“That will be a time when we can take stock and to see whether the approaches have been successful both in terms of greenwashing but also in terms of channelling funds … into the economy to help the transition,” she said.
That hiatus may also aid in the harmonisation of reporting standards and even of regulations internationally. The disjoint between disclosure rules across jurisdictions had been the cause of tremendous challenges to data managers and providers. In particular, it had prevented the comprehensive collection of corporate sustainability data that is vital for financial institutions to make investment and risk-management decisions.
Dittrich said she had been impressed so far by harmonisation efforts. The adoption of the Taskforce for Climate-related Financial Disclosures (TCFD) by the US’ Securities and Exchange Commission and the UK’s FCA as the basis of their ESG reporting proposals was a strong move towards convergence of reporting standards. She also said that the creation of the International Sustainability Standards Board (ISSB) under the IFRS Foundation was “incredibly encouraging”.
“International cooperation is fundamentally important to having a holistic framework, in particular for capital markets, and in particular for the cause of sustainability,” Dittrich said.
With the developments of 2022 in mind, she said she was “excited” for the future and could see harmonisation becoming a major force in regulatory oversight.
“As soon as you have dialogue and are serious around climate and sustainability, you will find … things start working out,” she said.
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