Although some responsible investment regulation is useful in terms of increasing awareness of ESG, investors are still sceptical about whether or not this regulation is driving real change, a report by the Principles for Responsible Investment (PRI) has found.
The Global Guide to Responsible Investment Regulation looks at almost 300 pieces of regulation covering pension fund rules, stewardship codes and corporate disclosure rules. It also includes interviews with policymakers, investors and stock exchanges in Europe, Asia, Africa and the Americas to find out if these initiatives change the way investors think about ESG, and ultimately the signals they send to their investee companies.
After looking at the data, the analysis suggests that while regulation is having an impact, regulatory frameworks aren’t fully aligned with sustainable development. Underpinning this is a belief that governments are failing to clearly signal the importance of ESG issues.
“Too often, the drafting of ESG regulation treats ESG as an optional add on, which investors can ignore if they so choose,” says Nathan Fabian, director of policy and research at the PRI. “We also see little monitoring of ESG-related clauses. While policymakers we spoke to discussed the techniques they use for monitoring the impact of regulation, this often falls short of holding individual investors to account – and the results are rarely made public.”
Another problem the report highlights is that policymakers haven’t made the link between their ESG goals – such as the COP21 agenda or the UN Sustainable Development Goals (SDGs) – and the financial system. While policymakers in China, the EU and France have started to discuss these issues, no government has yet articulated the role they expect institutional investors to play in achieving those goals.
The PRI hopes that the report will help governments make the crucial link between sustainable development and the finance industry. In order to do that, governments should collect – and publish – more information on how investors contribute to or undermine sustainable development objectives. They also need to monitor and assess the effectiveness of existing responsible investment regulation.
“Regulators are doing more to promote responsible investment, which is having a positive impact,” says Nick Robins, co-director of the UNEP Inquiry. “But in order to realise the full benefits of smart financial rules around ESG, we need clear national roadmaps along with international cooperation.”