Environmental, social and governance (ESG) investing and reporting is facing existential questions associated with a lack of standardization, regulation and common purpose, according to The emerging sustainability information ecosystem, a new report published by the EY organization and Oxford Analytica. Rising inflation and the war in Ukraine are compounding these challenges.
According to the report, growing allegations of greenwashing have become one of the major challenges to ESG credibility and success. Addressing these challenges and building trust in the system is the responsibility of the many players who shape the sustainability ecosystem if ESG is to be seen by stakeholders as on a par with the more established ecosystem of financial reporting.
The report argues that there has been a lack of agreement on what ESG should include, how to apply agreed metrics and how best to use available data. To build greater trust in ESG, The emerging sustainability information ecosystem outlines five core areas that must be addressed:
- Increased transparency over ESG ratings.
- Increased understanding of the varying uses of sustainability information.
- Independent assurance alongside enhanced reporting standards and rigor, similar to financial reporting.
- The development of agreed sustainable finance taxonomies to help eliminate confusion on what is considered sustainable and what is not.
- Lower barriers to entry for those from emerging economies.
“The extraordinary growth of the ESG movement is threatened by a lack of alignment and agreement on foundational concepts and, in worst cases, growing claims of greenwashing. Right now, ESG is facing a make-or-break moment and requires a whole system approach to addressing these issues. Sustainability is everybody’s business and more work must be done to encourage open collaboration and trust-building among those who shape the industry,” says Steve Varley, EY Global Vice Chair – Sustainability.
The report highlights the need for greater understanding of ESG ratings, materiality — including the varying uses of sustainability information, and the conditions needed to enable assurance. While there are increasing connections between ESG and financial reporting, the report identifies the additional voices and perspectives that shape the ESG ecosystem, including civil society and people in employment. It calls for greater engagement among these groups to develop reporting and disclosure standards, sustainable finance taxonomies and ESG ratings that serve investors including those focused on financial risk and social impact.
“Many of the current challenges facing ESG are a product of its infancy,” says Katie Kummer, EY Global Deputy Vice Chair – Public Policy. “The sustainability ecosystem is just more than 20 years old, and so still in its maturing stage compared to the financial reporting ecosystem. It is essential that we work together to build a system that is globally consistent, trusted, responsive and where everyone has a voice.”