Surveys Highlight Two Sides of ESG Market Evolution

Yann Bloch of NeoXam discusses the surge in ESG data spending due to regulatory demands in A-Team Insight, highlighting the importance of quality market and risk data to combat greenwashing

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Regulatory demands are expected to help boost spending on ESG data to a record this year but a significant part of the institutional space remains concerned that those same rules will limit the choice of sustainable investments.

Two recent surveys suggest that investors continue to champion sustainable markets. One, by management consultancy Opimas estimates that the market for ESG data will top US$2.1 billion this year, up 14 per cent from $1.9bn in 2023. Fastest growth will be seen in the purchase of indices, which is expected to grow 19 per cent. Uptake of research and analysis will climb 12 per cent, the Opimas study found.

A second survey published earlier, found that growth in ESG data spend by insurers will increase too. But the study, by Pureprofile for Dutch FinTech Ortec Finance, found caveats to that rosy picture.

Almost half of the 100 insurance professionals questioned said they were very concerned about the level of greenwashing when it comes to making investment decisions. At the same time, 80 per cent said they feared regulations to stamp out the scourge would lead to a reduction in the volume of potential investible products and assets.

Growing Pains

Together the surveys paint a picture of an ESG space that is yet to shake off its growing pains even as regulators begin to put in place controls more associated with mature industries. While institutions clamour to integrate sustainability into their portfolio and risk management processes, the absence of data reporting standards means they find it difficult to make honest assessments of investible instruments and companies.

That raises the potential for inadvertent greenwashing. At the same time, however, the rules put in place to prevent such market abuse have been criticised for trying to apply a one-size-fits all solution to the problem.

Consequently, some key ESG regulations have been tweaked since implementation. The EU’s Sustainable Finance Disclosure Regulation (SFDR), for instance, was phased in later than planned and is currently the focus of an assessment programme that could see parts of it redrawn.

Meanwhile, others have been watered down before introduction. The EU’s Corporate Sustainability Due Diligence Directive (CSDDD) is intended to force companies to address their impacts in human rights and the environment in their due diligence processes. But a less onerous version, composed amid threats by Germany and France to veto the rule, has just been approved by the EU’s Parliament. Its introduction has also been delayed.

Similarly in the US, the Securities and Exchange Commission (SEC) published a final rule on corporate climate reporting after excising key sections of its original proposal that covered the disclosure of Scope 3 emissions data. The rule’s implementation, expected in the Spring, has since been delayed by an appeals court following a challenge by the fossil fuel industry.

Data Absence

While corporate opposition to these measures helped tame some of their toughest requirements, change has also been driven by a recognition that the ESG space is not yet developed enough to make such rules workable. When the data needed to comply with those rules is largely absent it would be unfair to prosecute investors for inadvertently breaching them.

“For the vast majority of insurers who responded to this study, unwittingly greenwashing through their investment portfolios is a very real risk,” said Yann Bloch, head of product and pre-sales, Americas at software provider NeoXam. “This is not helped by the divergent levels of disclosures required on things such as climate risk across different jurisdictions, with Europe taking a much more rigorous stance than the US, for example.”

For insurers, the fear of greenwashing is accompanied by the possibility that the regulations will deprive them of the assets and companies in which they can allocate their capital.

“There is strong demand among insurers and insurance asset managers for specialist climate focused funds and green bonds but that is running up against increasing concern about the current level of greenwashing and a belief that the range of available investment opportunities will narrow over the next two years as ESG requirements become tougher,” said Hamish Bailey, managing director UK, and head of insurance and investment at Ortec said.

Bailey said that insurers need both support to identify investments and measures to reduce greenwashing. Bloch said that would come with better data.

The survey “highlights the requirement to have efficient access to high quality, varied information on entire investment portfolios, in order to assess the ESG impacts,” Bloch said. “As it stands, while the availability of this kind of ESG data is increasing, it can’t be accused of being equal to other types of financial information, and the legacy systems that many firms rely on may not be able to process this very different type of data that has risen in prominence recently.”

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