“ESG action reports are a soup of acronyms that require clarification and a commonly accepted definition of relevant concepts, in order to create a new, common perception that will lead to increased levels of trust,” says Dr Peter Gassmann, Global Strategy leader and ESG leader of the PwC Global network. He emphasizes that sustainable financing has not yet become a dominant criterion in banks, despite the fact that it is a key lever for achieving the goals of sustainable development. However, events such as the war in Ukraine, the Covid pandemic and the energy crisis are acting as catalysts for acceleration.
For Gassmann, Greece can become a pioneer in the whole effort, since with the help of the EU Recovery and Resilience Fund (RRF), it has all the possibilities to excel on the front of sustainable investments.
How can Greece be a pioneer in this process?
Greece as a country and Greek companies as individual entities have made great strides towards implementing environmental, social and governance (ESG) criteria and moving on the path of green and sustainable investments. The RRF can also play a pivotal role, acting as a catalyst for growth, with involved parties following ESG directives. The fact that Greece is part of the EU is integral in adopting and implementing the regulatory framework, thus setting an example both for the local players but also on an international level. In other words, if the involved stakeholders act in a quick and decisive way, the country has all the necessary potential to excel in sustainable investing, attracting international capital and setting an example on a European level.
What is the state of play in ESG reporting and how do you foresee the situation evolving?
The best way to describe the current reporting landscape is as an “alphabet soup” of choice, and, at the same time, one that is evolving fast.
As far as ESG standards and report methods and requirements are concerned, corporations and regulators are overwhelmed with a multitude of acronyms and methodologies, resulting in confusion, significant challenges in comparability of reporting, risk of cherry-picking metrics and ample possibilities of greenwashing.
At the same time, major global events, such as the war in Ukraine, the pandemic and the energy crisis act as accelerations, specifically in regard to the social and governance aspects of ESG. These crises highlight the need for strong regulatory structures that are determined by values of transparency and morality, whereas corporate governance is integral to maintaining social structure.
However, even as we speak, as far as the EU is concerned, there are significant moves towards the convergence of multiple framework providers, standard setters and other bodies that are the main stakeholders in ESG standards and reporting. And this convergence will help to move towards a unified approach and single set of global reporting standards. The same trend applies to both the UK and the US, signifying a global movement towards the inception and implementation of a “common currency” on a multinational and multisector level.
And I cannot overstate enough that trusting that what is reported is accurate is key to ensuring the effectiveness of our capital markets.
Furthermore, one must understand that current standards are more of a point in time observation. Instead, and in addition to that, we should also consider how we observe and measure transformations and ongoing processes.
This global shift severely impacts all major companies, since they will need to undergo significant transformation in order to achieve the aforementioned goals. And towards this end, we need a more dynamic way of understanding that roadmap, thus helping to capture their progress.
We have witnessed an overwhelming increase in sustainable finance during the previous months. Is this enough to cover global needs? And what are the challenges we are facing?
Sustainable finance has been recognized as a key enabler for achieving sustainable development objectives on a local and international level. However, despite the impressive recent growth, the sustainable finance market has a long road to maturity. And we must also take into account the fact that time is of the essence: There are just under eight years left to progress and achieve the UN’s Sustainable Development Goals (SDGs) by 2030 which require global investment ranging from US$5-7 trillion per year.
This means there is still a long way to go and we must cover it in a short amount of time. However, with swift endorsement and coordination, we can achieve the economic and sustainability impacts of sustainable finance.
As far as challenges are concerned, one can name the fact that potential issuers face barriers to sustainable finance issuance and at the same time investors have difficulties comparing sustainable securities. As I mentioned earlier, ESG ratings have unclear methodologies, inconsistencies and lags, and these complexities lead to longer timescales of issuing sustainable securities and unclear project pipelines. Another issue that comes into play is the reputational risks to investors and issuers if accused of greenwashing, since corporations face unclear disclosure standards which hinder comparison. And on a final note, despite the recent growth, it is still difficult to find sustainable financing that meets investor needs on ticket size and risk-return profile, given also the fact that, whilst primary market demand is strong, the secondary market remains weak.
Can these challenges be successfully tackled and is there a framework in place, able to facilitate the process?
Indeed there is, and to our good fortune, it is one that is already in place. I am referring to financial market infrastructures (FMIs), which are key components of the financial system, delivering services critical to the smooth functioning of financial markets.
FMIs have experience creating informational and connectivity efficiencies in traditional financial markets. Thus, the market can draw upon this experience to solve some of the fundamental challenges sustainable finance faces globally today.
Given the fact that the ability to transfer rules-based information within FMI systems already exists in the market, incorporation of ESG disclosure data files might be a relatively seamless addition to the market. For example, Euroclear’s EMX Message System for automatic fund management and Clearstream’s OneClearstream asset servicing portal could both be built upon to include this simplified reporting function.
To quantify the implication of this development, we believe that a cross-border FMI-driven approach has the potential to uplift the growth of the sustainable finance market by up to 2.5%. This increase translates into up to US$25 trillion additional capital mobilized in the sustainable finance market by 2030. And the majority of this additional capital could be channeled to emerging and developing economies which are in dire need of sustainable investments.
Furthermore, FMIs can facilitate sustainable finance which seeks real and measurable impact, beyond socially responsible investment. To this end, the OECD estimates that merely 10% of sustainable finance investments definitively seek sustainable development impact. This means that the additional capital mobilized by a cross-border FMI-driven approach translates to global time savings of up to 0.6 to 1.1 years in financing the UN’s SDGs, thus bringing us closer to the 2030 target.