Five Questions on Regulating ESG and Socially Responsible Investing

ESG and socially responsible investing are booming, as the priorities of people around the globe continue to shift. Dr. Robert Eccles, professor, author, and expert on integrated reporting breaks down how asset managers and investors can create sustainable strategies while keeping in mind the regulatory changes that are taking place in the ESG space.

 1. What is ESG investing? Why is it important?

ESG stands for Environment, Social and Governance. It is a way of channeling financial resources to promote positive global and societal goals while creating value for stakeholders.

ESG is particularly relevant today given the increased importance both society and investors place on these values. Many investors are also waking up to the long-term value creation of ESG strategies. Civil society, governments, investors and company employees are collectively driving the growth and momentum of ESG investing. This preference shift materially impacts how asset managers, asset owners and institutional investors must conduct business to satisfy these changing demands.

2. What are the current regulatory and policy drivers governing ESG investment?

Regulators and governments are both increasingly focused on ESG issues, such as corporate stewardship and climate impacts of business. In turn, this is exerting pressure on companies to adopt high ethical and behavioral standards to attract investment needed for growth. These are notable institutions who continue to aim to unify ESG standards and best practices across industries. Notably, materiality and transparency standards of ESG disclosures are currently being set by the Sustainability Accounting Standards Board (SASB) and the United Nations Principles of Responsible Investing (UN PRI), and others.

However, what is undoubtedly lacking currently is an agreed global regulatory framework which can be used as a basis for international standards. Presently, many ESG regulations are country specific. For example, the UK Stewardship Code is framed to enhance the quality of engagement between investors and companies to improve shareholder returns. In France, President Macron’s Article 173 has introduced a robust framework for mandatory reporting of ESG data by financial institutions and many hope this might form a basis for an EU or even global ESG framework. Additionally, the US and China are developing their own ESG standards and regulations. The EU and even Nordic countries also have their own standards. So, I would say it is country and regional but not global at present.

Finally, it is important to acknowledge there are a host of other stakeholders such as independent data and index providers, asset owners like pension and sovereign wealth funds, as well as the largest global asset managers playing an increasingly prominent role in ESG investment analysis. Each is also pushing for more standardization in terms of regulation and best practices.

3. What should global asset managers be doing to frame their ESG strategy?

Each asset manager needs to define with clarity what they mean by an ESG strategy. They need to consider how they will integrate ESG into their business model and investment strategy by identifying it for each sector. Basically, an asset manager must determine which specific ESG issues will affect each industry and asset class of investment. It must then integrate these determinations into its portfolio composition and financial information reported to the market. There are multiple ESG focused organizations with different competencies who can assist asset managers in completing these analyses. They also need to ensure that their business operates ethically in general. If positioning oneself as an ESG firm, it is critical that the behavior and values of the firm live up to these principles. Many asset managers are becoming signatories to the UN PRI standards, and the focus now is upon proving objectively that signatory firms operate to these principles in practice.

  1. Is there evidence that enhanced corporate disclosures result in increased levels of responsible investment? 

This really depends on what kind of corporate disclosure we are discussing. Disclosure and transparency is a great start, but by itself doesn’t enhance responsible investing. Transparency helps, but we also need to have credible information from each company that investors and asset managers can totally trust and reply upon. However, without any disclosures there would not be any way to promote sustainable investing. A lot of empirical evidence now suggests that ESG results in financial out performance over the longer term and ultimately this is what will drive investors to mass investment in socially responsible companies and projects.

The appetite for ESG reporting and disclosure is also introducing big data technologies such as natural language processing, AI and machine learning. There are many new and exciting data providers that are using these technologies to fulfill the need of ESG information for investors. An increasingly changing view of fiduciary duties is making this information all the more necessary.

5. Have you read any good books recently?

 I would say Blue Sky Over Beijing: Economic Growth and the Environment in China by Matthew E. Kahn and Siqi Zheng. I am also re-reading Moby Dick by Herman Melville for the first time since high school. I am really enjoying it!

About Dr. Robert Eccles

Robert G. Eccles is a Visiting Professor of Management Practice at the Said Business School, University of Oxford, where he is helping them start the Oxford Said Corporate Accounting and Reporting (OSCAR) Programme and conducting a joint research project with the Ford Foundation on creating more sustainable capital markets. Eccles has been a Visiting Lecturer at the Massachusetts Institute of Technology, Sloan School of Management and is a Berkeley Social Impact Fellow at the Haas School of Business, University of California Berkeley. He was a Professor at Harvard Business School and received tenure in 1989.

Dr. Eccles is a Senior Advisor to the BCG Henderson Institute, a member of the board of the Mistra Center for Sustainable Markets at the Stockholm School of Economics, and a member of the board of TruValue Labs, a big data sustainability vendor.  He was he founding Chairman of the Sustainability Accounting Standards Board and one of the founders of the International Integrated Reporting Council. In 2011, Dr. Eccles was selected as one of the Top 100 Thought Leaders in Trustworthy Business Behavior – 2012 for his extensive, positive contribution to building trust in business. In 2013, he was named the first non-accountant Honorary Fellow of the Association of Chartered Certified Accountants (ACCA), one of only nine since 1999.

Dr. Eccles received an S.B. in Mathematics and an S.B. in Humanities and Science from the Massachusetts Institute of Technology and an A.M. and Ph.D. in Sociology from Harvard University.

The views expressed in this material are those of the author as of 10/27/17 and may or may not be consistent with the views of Brown Brothers Harriman & Co. and its subsidiaries and affiliates (“BBH”), and are intended for informational purposes only. Neither Brown Brothers Harriman nor its affiliates or its financial professionals render tax or legal advice. Please consult with attorney, accountant, and/or tax advisor for advice concerning your particular circumstances. BBH is not affiliated with Dr. Robert Eccles.