Is framework uniformity the most pressing global ESG investment need?

Three investment professionals weigh in on whether international regime differences are a hindrance in developing ESG strategies.

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(L-R) Natalia Back, Hannah Herold, and Glen Yelton.

The road to streamlined, cohesive labelling frameworks and disclosure regimes will be bumpy, and friction and additional costs are to be expected.

At a recent Clear Path Analysis webinar, produced in conjunction with Clarity AI, Natalia Back, Associate Director, ESG Regulations, Private Markets, Manulife Investment Management, Hannah Herold, Director of Sustainable Research, American Century Investments, and Glen Yelton, Head of ESG Client Strategies, North America and EMEA, Invesco, spoke on the topic of “Maximising visibility in ESG regulatory reporting through the investment chain”. The group agreed that the challenges posed by varying frameworks needed to be worked on to create a cohesive culture for internationally-focused firms, so they weren’t deterred from working collaboratively or branching out.

Read more of their thoughts below.

Maya Sibul: What do you feel is hindering implementation [in the ESG regulatory arena] – and where is the real blueprint, if one exists?

Glen Yelton: What we've alluded to is that there is a benefit in iteration – and we can build on existing regulatory regimes with better versions as we move forward.

This can also cause problems because the market is not static. We have products today that are labelled under existing frameworks, and recalibrating those is difficult. There is friction and there are additional costs. We need to be aware from the outset that there will be the slight drag from regulatory change and improvement as we move along with this process.

The other impediment is around the language, as was previously mentioned. We have already seen two different levels within two different regulatory structures using the same term, so the question is: how do you reconcile this and pull things together?

Hannah Herold: I would also highlight some of the positives I’ve seen with Sustainable Disclosure Requirements (SDR) and its use of definitions. For example, when we look at our products and developing solutions for clients, we think on a scale from ‘alpha only’ outcomes to ‘alpha plus’ outcomes (traditional finance outcomes plus environmental and social outcomes).

On the ‘alpha only’ side, we have ESG integration, and SDR has said that this alone is not considered a sustainable investment label – which is in line with our framework. As we move towards ‘alpha plus’ outcomes, we consider benefits like, best in class, best in progress, and Contributions as seen with impact investing.

"It may seem hyper-specific, but a really important component
of SDR is the focus on sustainable improvers."

The other factor that’s important is the ‘sustainable improvers’ element because it aligns with the Benefit category and the idea of best in progress. We believe the market is evolving from just a ‘best in class’ approach to now evolving to include ‘best in progress’ allocations. It’s a key component of any kind of transition. It’s also a trend we’ve observed from large Nordic institutional investors over the last year.

It may seem hyper-specific, but a really important component of SDR is the focus on sustainable improvers.

Maya: Is the fact of multiple varying frameworks an urgent challenge for the global investor?

Natalia Back: Concerns remain around how globally operating firms can manage local developments.

With regulatory frameworks, ESG disclosure standards and requirements may vary significantly across different markets and jurisdictions, and there is an element to discuss here, which is the intent of the regulator creating labels and creating disclosure and reporting obligations.

The lack of convergence across sustainable finance regulations for both poses this threat to the comparability and increases the risk of greenwashing, including unintended greenwashing. It would be helpful to have a more uniform presentation of our investment strategies, and it would ease the burden of data if we had a more consistent regime.

"How do we maintain that comparability of investment
strategies if we are changing the recipe?

Glen: One of the tensions is that if you are implementing a global strategy you want to ensure the consistency of that portfolio across all markets so that none are disfavoured.

For example, whenever we start looking at the regiments that are being imposed – whenever there are human rights issues, climate related reporting, or other factors – all of these additional layers mean a specific product won’t be in the labelled group if it wasn’t built with those frameworks in mind. We could update and build something new, but that changes the portfolio and the investment thesis – and basically invalidates the previous returns and track record of that portfolio.

How do we maintain that comparability of investment strategies if we are constantly changing the recipe? Tweaking around the edges due to regulatory need can result in a problematic recipe change over time.

To see more of the group’s thoughts, and read the report in full, please click here.