Why is ESG important?
Environmental, social, and governance (ESG) investments are types of socially responsible investing that consider the impact on the environment, its stakeholders, and the planet in addition to the performance of the investment. ESG has started to gain traction in recent headlines and was one of the main topics of discussion in this year’s Singapore Fintech Festival. Companies with good ESG track records demonstrated lower volatility than their non-ESG counterparts during the market upheaval caused by the COVID-19 epidemic. For many investors, this performance justified ESG investments and its premise: that good corporate behavior leads to greater financial results.
What is Greenwashing?
When a firm spends more effort and money on presenting itself as environmentally friendly than on actually minimising its environmental impact, this is referred to as greenwashing. It is a deceptive marketing ploy meant to deceive investors who prefer investments with a positive environmental impact and attempt to capitalise on the growing demand for environmentally sound products.
Challenges & Risks
Greenwashing is increasingly becoming more difficult to identify as ESG concerns grow more popular among investors and portfolio firms, resulting in an exponential growth in the number of sustainable investment solutions.
- Lack of Reporting Standards
With no single global standard or recognised legal definition for ESG standards, ESG currently is largely voluntary compliance and poses a challenge to conclusively identify a product/service to be “ESG compliant”.
- Lack of Transparency
According to the Institute of Internal Auditors (IIA), a lack of transparency is a main point of friction in the further uptake of environmental, social and governance (ESG) investments. Investors feel there is insufficient transparency and corporate disclosure in relation to firms’ ESG activities, as well as a lack of quantitative data about the impact of ESG implementation.
- Data & Rating Inconsistencies
Given the relative infancy of ESG implementation, different rating agencies have disagreements on a company’s ESG performance. ESG ratings from multiple providers have a correlation of 0.3, which pales in comparison to credit rating agencies with the correlation between S&P and Moody’s ratings at 0.99.
Regulatory Compliance for ESG
MAS has issued its “Guidelines on Environmental Risk Management for FIs” , with the goal of enhancing the resilience and management of ESG risk by setting out risk management practices. MAS’ stance on ESG compliance to counter greenwashing is that ESG statements should be supported by fact or data, and it must be accurate and complete. Efforts to standardise ESG related guidelines are currently being developed, with MAS consulting the financial sector in 2021 on mandatory climate-related disclosures against international aligned standards.
As standards continue to develop in this evolving landscape, compliance remains a critical aspect across all industries. Adhering to and enforcing compliance can help companies detect violations of regulation, as well as mitigate the risk of illicit activities. Learn how the Regtank compliance suite can help you and your business effectively manage their entire compliance program on a single platform with higher efficiency and lower costs.
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