In the future, when the planet is much hotter and the seas are clawing at our coastal trading cities, those dealing in finance and capital markets will look back and wonder why we hadn’t got our act together. Why hadn’t we acted quickly enough to address the burning environmental, social and governance, or so-called ESG, issues of our time?

“Business as usual, entrenched ways of thinking, established attitudes, incentives and structures impede the adoption of ESG strategies, and also generate dangerous blind spots for traders and investors that choose to ignore them,” says Ioannis Ioannou, associate professor of strategy at the London Business School. “But in my view, the future of ESG integration is positive.”

The ESG investment process has never been easier

That’s because at no point in history has it been so easy to trade in ESG funds, bonds, exchange-traded funds and other financial products. A record number are available and $31 trillion of assets are now under management, according to the Global Sustainable Investment Alliance. It’s mainstream and no longer a side-show, campaign issue.

“The environmental pressures that the world is facing are only going to get worse. Therefore, even from a pure risk perspective, we expect more people to seriously engage with ESG factors,” says Dr Ioannou.

There’s no lack of analytical tools to assess what ESG scores look like. However, the biggest rub is a deficiency in quality data, definitions and standards. “This can lead to people making ESG evaluations based on superficial information. Many still use ESG factors in a box-ticking way,” according to Alex Edmans, professor of finance, also at the London Business School.

Why is financial reporting so difficult for ESG funds?

The issue of sustainability in financial markets still conjures up images of the Wild West, untamed, unpredictable and with no level playing field worldwide. When it comes to financial reporting, harmonisation is a word bandied around a lot. Transparency is everything, but it’s yet really to materialise at the global level. It’s a work in progress.

“There are many vendors and many different kinds of data,” says Anthony Renshaw, director of applied research at Axioma. “There is also extremely limited data history for ESG scores and a large fraction of scores come from self-reported data. Larger companies have an advantage in ESG reporting since they have deep pockets to make their data as attractive as possible and greenwashing is one aspect of this bias.”

The Task Force on Climate-Related Financial Disclosures is helping. It was set up because of concerns that assets were being mispriced because the full extent of climate risks were not being factored in. But not every company is registered.

“We have seen numerous examples, such as BP, Volkswagen, PG&E, where ESG issues have led to a significant repricing of company valuations,” says Roelfien Kuijpers, head of responsible investments at DWS.

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