Industry wants ESG regulation
A survey conducted by Duff & Phelps has revealed that 67% of the senior leaders within alternative assets think that regulatory bodies aren’t doing enough regarding ESG.
The desire for more regulation - a rare thing in itself - appears to be driven by greenwashing (whereby firms promote themselves as having ESG credentials, but in reality they lack substance). According to the report, there are numerous factors involved in ESG that determine the sustainability and ethical impact of an investment. Therefore, regulation of ESG would ensure these investments meet required standards, for example in energy use or emissions.
The report also acknowledges that investors into ethical managers need to verify ESG claims. Indeed, 33% of those surveyed believe that resource scarcity and global warming will have the most disruptive effect on the economy.
Commenting on the findings, Ryan McNelley, managing director, portfolio valuation at Duff & Phelps, said, “Given that so many senior people in the alternative investments space feel environmental and societal factors will be disruptive for the economy, it’s no surprise that most agree more regulation is needed to reduce potential greenwashing within the industry. At the moment, it’s still a bit of the wild west when it comes to how companies measure and market their ESG funds and how they report to their investors. Regulators and standards boards therefore need to consult with market participants across the industry and band together to lay out common standards in this area.”
A key problem with ESG reporting has been it’s qualitative nature - that it is difficult to find common data points. Only 25% of respondents agreed that ESG factors could be consistently and reliably measured to evaluate their cost versus benefit to investors. By contrast, 75% of respondents disagreed or disagreed strongly with this sentiment.
McNelley concluded, “The financial sector can be a powerful actor in fighting climate change and helping to propel social justice. However, we need to quantify and create a generally accepted standard for the measurement of ESG factors within the industry if we are to assess their effectiveness and benefits to society.”
This survey was conducted at the Duff & Phelps annual European Alternative Investment Conference, which took place in London on November 7.