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Data gaps and a complex regulatory regime continue to act as barriers to ESG investing, said asset managers and sustainable finance experts at the Reuters ESG Investment Europe conference two weeks ago.

The “massive burden of ESG reporting”, as one asset manager put it, is also coming up against a desire to weed out greenwashing, attendees said — a problem they do not see abating.

Fixed income fund manager

We are seeing greenwashing absolutely everywhere. In all forms.

The public and private debt markets were singled out as lagging behind the equity markets with regards to both greenwashing and ESG data, with one pension scheme in particular bemoaning the limited ESG data available from their small to mid-sized loans portfolio.

However, attendees acknowledged that ESG is growing in prominence in the fixed income market. The issuance of green bonds especially is rapidly scaling, a representative from the London Stock Exchange Group (LSEG) said, with borrowers expressing a “strong commitment” to continuing this healthy issuance despite a higher interest rate environment.

Less than a week after attendees at COP27 chastised the financial sector for its lack of action to meet climate targets, the panel discussions at the Reuters conference revolved around data (whether there was enough of it), regulation (if we needed more of it), and greenwashing (how to prevent it).

Combined ESG scores were also targeted at the conference for being stagnant and lacking transparency in their methodologies, while the expansion of ESG data standards and increased regulation was set against the burden they placed upon issuers.

Ultimately, speakers were confident in the future of ESG investing practices — even in the debt markets — with one pension fund quipping, “what is not sustainable comes to an end.”

The LSEG representative, meanwhile, noted that while 57% of investors say that their main reason for sustainable investing is to mitigate long term risk, ESG as a driver of economic opportunity is increasingly shaping investor decisions.

Data gaps — the main barrier to ESG for investors

ESG data presented a double hurdle for investors, who were simultaneously overwhelmed by the amount of data and in need of more.

Panellists highlighted that investors were finding it challenging to sift through the noise and access data that was relevant and useful. Climate data is easier to access and measure because of the scientific parameters surrounding what qualifies good and bad performance, institutional investors speaking at the conference said. Social and governance data, however, proves to be more of a challenge.

Generalised ESG scores (combined ratings of a firm’s ESG performance) also lack the long-term outlook and transparency to be useful to funds, institutional investors speaking said, echoing industry criticisms of the “black box” methodology used in general scores. (Find a high level look at ESG scores here)

Even scores broken down into specific ESG categories were lacking when it came to standardisation and transparency around methodology, speakers added, with some panellists admitting that for those reasons some investors don’t use ratings at all and instead rely on raw data.

Regulation has a role to play in filling data gaps left by voluntary reporting, investors went on, as it would standardise reporting and increase transparency around methodologies. Although this notion was relatively well received by asset managers throughout the event, the impact of regulation was under scrutiny throughout the conference.

Two issuers speaking on the sidelines of the conference particularly singled out Scope 3 emissions as difficult to track and measure. “We leave them to the last minute to put together for our investors,” joked one issuer. “It’s just that much of a pain.”

Regulation overburdens investors but mitigates greenwashing

Panellists expressed fears that the increased reporting burden on investors — coupled with an already complex regulatory landscape — would act as a deterrence to sustainable investing, despite increasing the level and quality of disclosures.

The Sustainable Finance Disclosure Regulation is designed to increase transparency and reduce greenwashing through standardised disclosures. However, the regime's success so far has been called into question and was criticised by panellists for being “clunky and confusing”.

Investors at the Reuters conference particularly criticised the SFDR’s unclear definitions and lack of minimum criteria for Article 8 and 9 funds. On 21 November, the day before the conference began, Amundi and Deutsche Bank announced that they were downgrading around €47bn worth of funds from EU’s SFDR Article 9 to Article 8 funds, highlighting the significant amount of confusion surrounding the regulation.

Desiree Fixler, a former DWS Chief Sustainability Officer and ESG activist, had a different view. Fixler argued that enforcement had a significant role in mitigating greenwashing and was in fact more important than policy and regulation. “Enforcement is what’s needed,” Fixler said, highlighting the raid of Deutsche Bank’s DWS by German prosecutors and the US Securities and Exchange Commission handing Goldman Sachs a $4m fine over greenwashing claims.

Attendees also criticised the EU Taxonomy, a sustainable investment classification scheme, for lacking clarity and contributing to the confusion surrounding the energy transition. Speakers felt that the Taxonomy’s primary blunder was making it seem like gas is a green energy source despite its negative environmental impact. When asked about the potential need for a social taxonomy, meanwhile, the speakers were hesitant to support it because of its potential to do more harm than good by further complicating reporting burdens.

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