ESG Investing  

Why are ESG frameworks important?

This article is part of
Guide to ESG and regulation

Why are ESG frameworks important?
(Steven Hylands/Pexels)

As with any investment philosophy and process, it is important to lay the foundations with a clearly defined framework in order to meet the stated investment objective. 

Due to the subjectivity of environmental, social and governance-themed investing, it becomes increasingly important that fund groups ensure clarity and transparency in both their methodology and messaging around this increasingly important subject. 

Therefore ESG frameworks, which are systems for standardising the reporting and disclosure of ESG metrics, are intended to aid investors’ understanding and provide the investment community with consistency.

But with there being a variety of different approaches to the disclosures provided and frameworks implemented, it presents challenges for investors and financial advisers in making sense of it all, which is one of the greatest challenges with ESG today. 

Alix Lebec, founder and chief executive of Lebec Consulting, says the industry lacks a unified language, methodology, and response to disclosure requests. 

“We don’t have a common data set across all of ESG to compare, distil and analyse information that would allow us to make decisions globally. 

“There needs to be clearer guidelines and consensus on what ESG investors should do, what frameworks they should use and what disclosure requests are coming their way.”

There might be some good news on the horizon, with the development of the International Sustainability Standards Board to ensure there is a global baseline to measure and report on ESG, and then there is the UN's Sustainable Development Goals, which also provide a barometer to measure progress on ESG targets. 

“These are global goals that can set a viable roadmap for ESG investments. We are still lacking, however, common, clear disclosures for the ‘S’ that would provide comparable data sets on companies’ social impact performance, and would enable us to assess and mitigate risks,” Lebec adds.

Towards an industry standard

The Financial Conduct Authority's work on labelling will hopefully help develop an industry standard set of terms that can be adopted for consistency. 

Consistent ESG frameworks, labelling and the use of data are essential in removing barriers to integrating responsible investment as standard practice. 

For example, the fact there are no industry-wide definitions is creating all sorts of confusion, increasing the risk of greenwashing and mis-selling, experts warn.

Lebec says it is important to note that while many investors, companies, and managers have historically boiled ESG down to being an environmental construct, it should be recognised that there are three main components to ESG that are interconnected.

In recent times there has been a much greater focus on social and governance issues.

Following some high-profile corporate governance failings – with some companies failing on both pay and working conditions – there is a much sharper focus on these particular issues now. 

E, S and G

Ryan Medlock, senior intermediary development and technical manager at Royal London, says: “You wrap all of this up together and you can see how this is fuelling consumer demand and presenting opportunities to the advice community to engage with clients on these different themes.