All, Blog, Regulation

What do financial players need for ESG success? Start with standards.

By Mike Trinkaus

Despite considerable and not unwarranted skepticism, there’s a “tsunami of money” flowing into ESG-friendly companies and instruments. That’s according to the head of Singapore’s largest bank. That same storm is hitting Wall Street, the Square Mile and financial hubs worldwide.  

Some $17.1 trillion in assets were guided by sustainable investing strategies in the U.S. alone as of 2020, a 42 percent spike over two years. Groups like Institutional Shareholder Services are seeing clear links between ESG performance and financial performance.  

On the other side of the coin, rules are coming down from regulators that could complicate it all rather than add clarity. 

As we recently discussed with KPMG’s Michael Hayes, ESG now requires serious attention. But how can fund managers, investors, private equity and others better report and compare ESG-friendly companies or instruments, and in some cases avoid being set up for a scandal? How do they watch out for surprises and confusion. 

They need some kind of pragmatic framework. 

At the moment, ESG reporting remains largely ungoverned relative to traditional measures of performance. The European Union and the US are taking initial steps to figure out what firms should be held to account for, and what claims around carbon emissions, governance and working conditions are credible. 

Gary Gensler, the head of the US Securities and Exchange Commission, made headlines when he said his staff were looking into what information firms and companies would need to provide in relation to ESG priorities like climate-related targets and workforce interaction.  

“Disclosure helps companies raise money. It helps the efficient allocation of capital across the market. And it helps investors place their money in the companies that fit their investing needs,” Gensler said.  

But it will likely take time for the SEC to decide and refine what those disclosures should include, what oversight will look like and how to facilitate investor confidence. 

So what to do now? 

Do this first 

Mike Hayes says the first step is figuring out a practical initial ESG framework that you can modify later as new information comes in. This framework can take lessons from disclosures from other firms, model frameworks from industry associations and be shaped by a focused internal team. 

Watch the full episode of The Private Capital Strategy Series here for the details of Mike’s advice. 

ESG and digital transformation 

Once firms or fund managers have their framework in place, the next challenge is figuring out how to find, process and analyze the best new ESG data.  

For public companies with reporting requirements, this may be fairly straightforward, as Mike points out in the episode. For private companies, extracting relevant data and tracking performance can be more complicated, often requiring infrastructure and specialized industry expertise that were the things that might have kept these businesses private in the first place. As financial firms embark on digital transformations to meet the changing demands of their clients and partners, the data ops and automation that helps that process, can also meet the exotic needs of ESG. 

How do you integrate ESG metrics into your databases and dashboards? How can advanced technology help harvest and analyze ESG data to give you a competitive edge? How can these insights be delivered on a streaming basis to people at your firm who can take corresponding action?  

We will have a future episode to show you how. Stay tuned!  

Mike Trinkaus is the CEO at 4Pines Fund Services.