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At the Summit for ESG London last week, Auquan CEO Chandini Jain participated in a provocative discussion on sustainability reporting, Sustainable Disclosure Requirements (SDRs), and label regimes with Hortense Bioy (Head of Sustainable Investing Research, Morningstar Sustainalytics), Oscar Warwick Thompson (Head of Policy and Regulatory Affairs, UKSIF), Frederik Verpoest (Head of Sustainable Investments Disclosures, The Phoenix Group).
The group discussed the importance of ESG data, the latest developments in the field of ESG, best practices for ESG reporting, and ESG compliance. With sustainability becoming a crucial factor for investment decisions, understanding these developments may help investors to make more informed investment decisions.
Some questions and key takeaways tackled on the panel included:
Is SDR achieving its purpose? What practical challenges exist?
The SDR of the UK aims to reduce greenwashing by setting clear standards and criteria for sustainable investment claims of investment firms and it has contributed a lot to building trust in the industry. However, it also has significant challenges:
Data quality: Obtaining high-quality, consistent ESG data is a huge challenge, especially for private markets. Many ESG metrics rely on self-reported data, variations in quality, and disclosure practices, which can hinder comparability and accountability, leading to uneven application across firms.
Resource constraints: Unlike large asset managers, small investment firms face significant costs and complications associated with SDR compliance. This could lead to an unintended market gap in which only large players fully participate.
How does SDR fit against other regulations (TCFD, ISSB, SFDR, EU taxonomy)?
Scope: While TCFD and ISSB are recognized internationally and crucial for sustainable investment practices, they have limited scope. SDR broadens the scope by requiring detailed ESG disclosure across environmental and social factors. In addition, SDR aligns with known international regulations, allowing UK firms to easily meet both domestic and international requirements.
Market-specific: Most regulations are designed for the EU market; however, SDR is specifically made for UK sustainability needs. With this regional focus, UK firms can meet unique local sustainability goals, such as the UK's net-zero by 2050 target, while also ensuring compatibility with broader EU initiatives.
Better transparency with defined labels: Unlike other regulations, SDR incorporates a labelling system. The labels are categorized into different funds, such as Sustainable Focus, Improvers, and Impact labels. These labels allow investors to easily identify and compare products based on sustainability objectives.
What should a sustainability objective report look like?
- Detailed KPIs: Sustainability reports should go beyond basic ESG metrics and integrate both quantitative and qualitative Key Performance Indicators (KPIs) that cover environmental impacts (such as carbon emissions) as well as social factors (such as community engagement).
Clear theory of change: For funds under the Sustainable Impact label, reports need a clear theory of change that links investment activities to specific environmental or social outcomes. This should be grounded in a methodology that tracks causal pathways from investment to impact, offering transparency on how each investment contributes to broader sustainability goals.
Verification and assurance: To increase credibility, the reports should include third-party verification of data where possible. Similar to financial audits, these assurances can validate sustainability claims, strengthening investor trust and supporting SDR's goal of curbing greenwashing.
Do sustainability labels drive real-world impact in investment products?
- Potential for true impact: Historically, labels have driven impact in sectors like agriculture with FSC or Fairtrade. For financial products, SDR investment labels may produce a similar or better impact if they are supported by rigorous criteria that necessitate measurable outcomes rather than simply aligning with general ideas.
Avoiding 'Impact Dilution': There is a risk that labels may lead to surface-level compliance, where products are marketed as sustainable without delivering on promised outcomes. It's essential that SDR labels are grounded in rigorous standards to ensure that labelled products contribute meaningfully to sustainability rather than merely marketing sustainability attributes.
Driving capital to high-impact sectors: SDR labels have the potential to guide capital towards industries that need investment the most, such as renewable energy or affordable housing. By aligning financial flows with environmental and social priorities, these labels could help in the transition to a more sustainable economy.
The TSESG London 2024 event provided an excellent opportunity to spread awareness about SDR and ESG risks, reporting, and compliance and exchange ideas about the future of ESG reporting. As SDR and other frameworks evolve, it is evident that making meaningful progress will require many complexities, including high—quality data, rigorous reporting, and genuine commitment to long-term outcomes.
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