More Effective Regulation Required To Drive ESG Advancement

The Principles for Responsible Investment (PRI) have today published a report, the Global Guide to Responsible Investment Regulation, which has found that that while some responsible investment regulation is successfully raising awareness of ESG, investors remain unsure as to whether or not this regulation is resulting in real change.

The report 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,” said 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,” said Nick Robins, co-director of the UNEP Inquiry. “But in order to realize the full benefits of smart financial rules around ESG, we need clear national roadmaps along with international cooperation.”