How investors can prepare as the SEC expands on ESG

Environmental, social and governance (ESG) goals have become front and center and dominate business conversations around the world. Organizational leaders are taking action to support ESG programs and processes and help all stakeholders – investors, employees and customers – understand the big picture with clear ESG strategies. In addition, today’s institutional investors are tasked with substantiating their net-zero green energy pledges and commitments with hard facts and reporting.

Across the pond, leading regulators, including the EU and the UK, have issued guidelines on what companies should disclose from now on. Later this year, the SEC will finally introduce its overarching disclosure rules, which include requiring companies to disclose detailed data about their sustainability strategy, starting with the environment and financing greenhouse gas emissions through investments. These disclosures not only relate to the results resulting from the transition to sustainable activities, but also to the impact of their supply chain on their ESG scores.

Yet investors understandably struggle to figure out the processes, procedures and strategies they need to be compliant from day one. Leaders who challenge the status quo and implement compliance measures will avoid major financial ramifications and unwanted scrutiny by regulatory authorities. The lack of standardized criteria makes it challenging to know what makes an investment sustainable. Despite all this, stakeholders agree that their focus should be on sustainability and data.

To facilitate compliance with disclosure data and achieve ESG goals, here are several tactics that can help institutional investors jump-start their US ESG financial compliance activities.

Use Europe as a model

Europe leads the regulatory landscape in ESG, making it an important resource for the US as it prepares for more formalized ESG regulation. While nuances exist among European regulations — and standardization will no doubt be an issue given the historical evidence surrounding global regulation — much of Europe continues to publish more sophisticated guidelines that are likely to impact SEC disclosure requirements.

For example, the UK Financial Conduct Authority (FCA) has issued increasingly detailed guidelines that prescribe numerous investor classes, such as public companies And asset managers. The European Insurance and Occupational Pensions Authority (EIOPA) has developed a comprehensive framework for cornerstone investors such as pension funds and insurers. With supervision also expanding to more “niche” categories, the European Commission (EC) last year has approved a clear guideline for investments in bridge fuels such as gas and nuclear energy.

In light of these recent changes to European frameworks, investors would do well to review these guidelines as similar oversights loom in the US.

Develop an integrated ESG strategy

To make ESG a core part of the business, investors need to step back and think about their ESG reporting as they think about any other organizational function: with clearly stated priorities, goals and results. This starts with asking important questions like:

• What are the ESG criteria we want – and probably need to report on – for our investments?
• How do we change organizational structures to integrate sustainability into investment analysis and decision making?
• What are the short, medium and long term benchmarks we are trying to achieve, and how do they integrate with our operational goals?
• What are the financial benefits of our ESG-focused investments? Is the return of ESG-friendly investments better than non-ESG-friendly investments?
• Do we have the data we need to make this happen, and how do we get it?

Companies that communicate their ESG goals to investors and explain how their commitments can meet their benchmarks have the opportunity to generate meaningful shared value and competitive advantage. In this way they increase their chances of successfully implementing environmental and sustainable initiatives.

Data management strategy for ESG reporting

We are currently seeing inconsistency and a wider variety of self-reported ESG data by securities issuers, along with different methodologies for determining metrics. This acute lack of standardization points to many different factors, including the pool of vendors supplying this data to the market.

Investors are increasingly relying on more than one data provider to get a comprehensive view of ESG factors within investments. Therefore, organizations need scalable technology that can support data aggregation and normalization of third-party data. A consistent data management strategy can help organizational leaders easily report sustainability metrics to business stakeholders and regulators.

Anticipate a crackdown on greenwashing

While ESG has become a bigger decision factor and more intertwined with stock prices, discussions of ESG inflation have revealed weaknesses, particularly around ESG anomalies and misconduct. To address ESG misconduct, the SEC created a Climate and ESG Task Force and issued a handful enforcement actions throughout 2022. As the volume of ESG-related assets under management increases rapidly, it is expected to reach close to $34 trillion by 2026, we expect regulatory enforcement to follow suit, according to PwC.

For investors, this market size means the potential risk for exposure is immense. To mitigate ESG risks, robust technology-enabled capabilities can bring transparency to data, enabling organizations to detect greenwashing risks early and often. Technologies such as blockchain can help credentialize carbon credits and increase transparency on ESG factors in the supply chain. While this is likely to be challenging for many investors in traditionally sluggish industries such as insurance and government, now is the time for investors to hone their blockchain and tech automation skills and fill their ranks with the talent they need to enable better corporate governance. .

Closing thoughts

While ESG enforcement may only be taking shape in the US, late adopters who fail to follow best practices could soon face huge repercussions. By looking to European regulations to prepare for upcoming US ESG-related disclosure requirements, organizations can develop an integrated ESG and data strategy across business lines and functions, and invest in detecting greenwashing risks, ensuring that investors have a good reputation with regulators can keep. Away from the regulatory clutter, investors will gain visibility and peace of mind that their ESG investments are indeed being used in the way they were intended.

Sandeep Sahai is CEO at Clearwater Analytics.