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ESG harmonisation push gives cheer for derivatives

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By Ross Lancaster
17 Sep 2020

A push towards harmonising data and reporting standards in ESG finance is gaining momentum and is a much-needed move in the development of the market. This was the message from panellists at GlobalCapital’s Sustainable and Responsible Investment Capital Markets Virtual Forum this week.

The news will be welcomed by derivatives bankers as they structure products to fit ESG themes. The past year has seen innovation accelerate in ESG derivatives and bankers pump out products across equity, credit and rates.

But bankers are increasingly crying out for greater harmonisation of data inputs. Unlike other derivatives, ESG as an asset class is still an evolving concept. This can make it hard to structure derivatives based on the theme.

Derivative users are not alone. Harmonising data standards and reporting frameworks are pressing topics among dedicated ESG market participants. A lack of clear and standardised data is preventing all investors, not just those who trade derivatives, from correctly pricing ESG risk.

“The reason why we focus on the standards piece rather than the rest of the ecosystem of data, which is equally important, is because the nuances of individual investor analysis or individual rating agencies have been quite significant,” said Clara Barby, chief executive at the Impact Management Project, speaking at the forum. “And people will judge things as to whether they are a risk or an opportunity quite differently and that is natural.

“What we need is a standards piece, so that if anyone wants to look under the hood you know you have a comparable data piece underneath.

“[For] those coming to this conversation with a values-driven lens — whether wealth managers or large asset managers whose pensioners might say that they want to see this — that is putting additional pressure on the measurement conversation because, interestingly, people talk about positive and negative impacts as though it’s a given.

“In fact, the only way you can know is if you have credible data that you can compare to a social or environmental threshold. Local living wage is an example of a social threshold; we have science-based targets for carbon. That makes for a more sophisticated measurements conversation.”

Last Friday, the ESG investing ecosystem won an advance when the CDP, Global Reporting Initiative (GRI), Climate Disclosure Standards Board (CDSB), International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) announced a shared vision for a comprehensive reporting system. This includes integrating sustainability standards and frameworks with accepted financial reporting principles and creating a basis for a coherent and comprehensive corporate reporting system.

“This joint vision is significant for several reasons,” said the group of five. “First, there are many types of organisations playing various roles in the sustainability disclosure landscape, which has led to ongoing confusion about which actors are playing which roles, and how companies and investors should interact with these different players.  

“Second, because sustainability information serves a much broader array of stakeholders than traditional financial reporting, no single standard or framework suffices. Notably, there are two lenses through which to view environmental and social issues: how these issues impact a company’s financial performance and long-term enterprise value, and how a company’s actions on these issues impact society and the environment.

“Perhaps most importantly, this is the first time that the five major players in sustainability disclosure have aligned on a definitive shared vision.”

By Ross Lancaster
17 Sep 2020