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Including environmental, social and governance (ESG) factors in financial markets

28 April, 2021Chris McHugh

Demand for ESG, sustainable investments and green funds is growing, driven by rising awareness of sustainability issues and increasing appetite to tackle climate change. But without standardised terms and definitions, this presents several challenges for financial markets. We look at the challenges in the context of the European Union’s (EU’s) new regulatory frameworks.

Plant shoot growing on a pile of gold coinsYou often read reports in the financial press on how investment managers are developing new ‘ESG’ or ‘sustainable’ products – or even redefining their investment philosophies.

As more funds flow in this direction, there’s been increasing demand to standardise definitions and terms. This is the only way that investors can have clear sight of what they own and ensure that products are comparable.

This is the focus of the latest white paper from our Centre for Sustainable Finance.

Download The inclusion of environmental, social and governance (ESG) factors in financial markets

What’s driving new ESG regulation?

The driving force behind new regulations has been to protect end investors and make sure that products with a ‘sustainability’ or ‘ESG’ label do what they claim to do.

However, it’s a challenge to make everything consistent – even within the European Union.

Alternative taxonomies and regulations are being developed elsewhere in the world. When the same concepts are extended to these regions, there’s a risk of market fragmentation. And this is a potential drag on future investment flows.

Nevertheless, all such regulatory journeys have to begin somewhere. And it’s better to have guidance and structure to harmonise markets and give clarity, than to rely on self-certification or inconsistent methodologies.

It’s also important to acknowledge that the reporting and taxonomies will end up driving investment flows and dictate what is sustainable.

To that end, regulators have a moral obligation – to all of us – to make choices based on what is best for society and the planet.

ESG, financial markets and sustainable finance

The new legal framework on sustainable finance will lead to a global rethinking of such topics and ESG inclusion will no longer be a nice-to-have process but a real compliance matter. To achieve this, a consistent approach in the methodologies and scoring of ESG factors is required.

Marco Boldini and Teresa Mattioli – from global law firm, Orrick, Herrington & Sutcliffe – explain all these challenges in the context of the European Union’s (EU’s) new regulatory frameworks.

Their white paper, for our Centre for Sustainable Finance, looks at:

  • the rising interest in sustainable finance from investors
  • the European Action Plan on sustainable finance
  • the new European legal framework to include ESG criteria in the financial markets
  • amendments to the MIFID II rules and other measures.

Download The inclusion of environmental, social and governance (ESG) factors in financial markets

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