More robust regulation needed to move ESG forward says new PRI guide
LONDON, 5 December 2016
A report published today by the Principles for Responsible Investment (PRI) —the Global guide to responsible investment regulation— has found a strong correlation between responsible investment regulation and better ESG risk management by companies. It also found that while some responsible investment regulation is useful in terms of increasing awareness of ESG, investors are still sceptical about whether or not this regulation is driving real change.
The report looks at almost 300 pieces of regulation covering pension fund rules, stewardship codes and corporate disclosure rules. It also includes interviews with policymakers, investors and stock exchanges in Europe, Asia, Africa and the Americas to find out if these initiatives change the way investors think about ESG, and ultimately the signals they send to their investee companies. Key findings include:
- Responsible Investment policy is widespread and the pace is increasing. Over half of the policy initiatives noted in the study were created between 2013 and 2016
- Policy effectiveness is hampered by weak implementation and weak signals. Investors are sceptical of the effectiveness of policy because of weaknesses in policy design and monitoring and inconsistency between different government departments and regulators.
- Despite the increase in sustainable finance regulation, most governments aren’t connecting ESG and sustainability and capital markets policy – but there are signs this is beginning to change.
“Too often, the drafting of ESG regulation treats ESG as an optional add on, which investors can ignore if they so choose,” said Nathan Fabian, director of policy and research at the PRI. “We also see little monitoring of ESG-related clauses. While policymakers we spoke to discussed the techniques they use for monitoring the impact of regulation, this often falls short of holding individual investors to account – and the results are rarely made public."
Another problem the report highlights is that policymakers haven’t made the link between their ESG goals – such as the COP21 agenda or the UN Sustainable Development Goals (SDGs) – and the financial system. While policymakers in China, the EU and France have started to discuss these issues, no government has yet articulated the role they expect institutional investors to play in achieving those goals.
The PRI hopes that the report will help governments make the crucial link between sustainable development and the finance industry. In order to do that, governments should collect – and publish – more information on how investors contribute to or undermine sustainable development objectives. They also need to monitor and assess the effectiveness of existing responsible investment regulation.
“Regulators are doing more to promote responsible investment, which is having a positive impact,” said Nick Robins, co-director of the UNEP Inquiry. “But in order to realize the full benefits of smart financial rules around ESG, we need clear national roadmaps along with international cooperation.”