World needs better tools, data, standards for ESG investing

OECD reports inconsistencies could undermine confidence in market.

As ESG investing has proliferated in recent years, so have the number of standards, definitions and strategies, resulting in a confusing morass that hamstrings sustainable investors.

That’s according to the Organisation for Economic Co-operation and Development, which said in its annual business and finance outlook, published on Tuesday, that while consideration of environmental, social and governance issues is rapidly “becoming a part of mainstream finance,” there is “little common understanding” on “what the goals of ESG investing are or should be.” While most investors seek to incorporate ESG factors to better manage risks and improve returns, they lack the tools needed to do this efficiently, including consistent data, comparable metrics and transparent methodologies, the OECD said.

Sustainable investing has grown rapidly in recent years, with more than $30 trillion of assets worldwide now incorporating some level of ESG consideration. Investors have piled into ESG because they’re under pressure from clients, employees and the public to contribute to a fairer and greener society, and because there’s a growing recognition that “non-financial ESG risks can have a material impact on risk-adjusted returns,” the OECD said, singling out the coronavirus as a case in point.

“The COVID‐19 pandemic has highlighted an urgent need to consider resilience in finance, both in the financial system itself and in the role played by capital and investors in making economic and social systems more dynamic and able to withstand external shocks,” the OECD said. The report “is a call to action for governments and market participants to make ESG investing fairer, more transparent and more efficient.”

ESG data, which tracks companies’ performance on everything from carbon emissions to the diversity of their workforces, are inconsistent and incomplete. There are no universal standards for the disclosure of ESG-related data, and companies aren’t compelled to provide ESG information.

Current market practices “present a fragmented and inconsistent view of ESG risks and performance” and fiduciaries, such as asset managers, aren’t always able to get the data and information they need to manage ESG risks effectively.

“If left unaddressed, challenges in ESG investing could undermine investor confidence in ESG scores, indices, and portfolios,” said the OECD. “We cannot rely on finance to deliver better environmental, social or governance outcomes if investors do not have the tools and information to price related risks and direct investments accordingly.”

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The Paris-based OECD, a club of the world’s richest democracies, was established in the 1960s to shape policies that encourage prosperity and equality.