Head of Investment Data Science at Northern Trust says global regulatory pressure will be felt by issuers and managers worldwide
While it’s fair to say that ESG has officially entered mainstream consciousness, some regions of the world, notably Europe, are undeniably ahead of the curve when it comes to ESG regulation and disclosure practices. But that doesn’t mean investment managers and companies won’t face the same pressures elsewhere.
“I don't think you're going to be isolated [with respect to ESG reporting] in any region,” said Paul Fahey, head of Investment Data Science at Northern Trust. “I do think it is a global challenge … there are no locations or regions that are going to be immune.”
Using carbon emissions as an example, Fahey noted that companies are under increasing pressure to report not just on their own emissions, but also downstream emissions generated from the use of their products. At the other end of the value chain, with global supply chains are more and more being expected to look through all their suppliers, regardless of location, and report on increasingly in-depth aspects of their activity.
“While Europe has pushed their companies and pushed the fund industry to be an ESG leader there, I think the US is following along fast,” he said. “The US Securities and Exchange Commission is talking a lot about what their requirements are going to be for foreign companies with respect to ESG disclosures and reporting.”
Across the world, a number of securities regulators have either developed and enacted regulatory requirements, or published policy recommendations and guidance pertaining to ESG or sustainability-related disclosures for investment funds. The International Organization of Securities Commissions (IOSCO) has established the Sustainable Finance Task Force (STF), which aims to improve sustainability-related disclosures made by issuers and asset managers, among other objectives.
In October last year, the Canadian Securities Administrators (CSA) unveiled a draft framework of climate-related disclosure requirements for reporting issuers, which it opened to a 90-day public consultation. Last week, the CSA published guidance on ESG-related investment fund disclosure, which set out expectations particularly for funds whose investment objectives reference ESG factors, as well as ESG-related funds.
“Interest in ESG investing is on the rise and this enhanced and practical guidance will play an important role in helping investors make informed decisions about ESG products, as well as preventing potential greenwashing," Louis Morisset, CSA chair and president and CEO of the Autorité des marchés financiers, said in the statement announcing the guidance.
The pressure for companies and fund managers to disclose ESG data, Fahey says, is coming from two fronts. As investors increasingly look to satisfy investment objectives other than those related to financial risk and return, they’re increasingly looking for transparency and disclosures that would allow them to find products and companies that align with their values or convictions. Meanwhile, regulators and financial industry groups are trying to build the frameworks that would provide the standardization and consistency investors need to compare and evaluate different options.
“I think what the regulators will drive probably more than the investors is that standardization or consistency,” he says. “That's likely where the regulators are going to have the most sway. But I still think the investors themselves are really the ones that are going to drive what the managers need to do.”
