Thanks Hugh. Great as always to see some structured thinking on this mess of industry/market/product trends. It's not just about one thing and you've captured the interplay well.
Interesting piece Hugh. Thanks for mentioning my Edinburgh Uni article. SFDR is an incoherent mess, and its not the only piece of regulation with unintended consequences - and all are draining energy and resources from effective ESG action.
On the bright side, financial flows to climate solutions continue to accelerate almost exponentially* as clean tech costs fall and geopolitical competition heats up. Perhaps the long-bemoaned disconnect between investor-ESG and real world change has a silver lining: real world change can happen even if ESG is in the doldrums. Would be good to catch up at some point craig.mackenzie@ed.ac.uk
Hugh it might be a paradox that regulation goes up and investment action goes down, but it's no surprise to me. I have banged on (to deaf ears) about the growth of over regulation and about ESG being reduced to a compliance function. The problem is we have let the bureaucrats and the financial system types take over a system built on asset owner action.
Hi Fiona, agree to some extent, IMO regulation/incentivisation should majoritarily be for the activities, not the actors (who usually game it). All regs need to be as smart, pragmatic and political/lobby proof as possible.
But, sadly, we are where we are.
A through simplification and efficacity review is required on many different fronts...hard, but necessary work.
Hopefully one of the points I was trying to get across in my piece.
I think asset owners could be lead wagons on this: call it enlightened societal/self interest!
I agree Hugh - up with regulation, down with action?! I think it bears remembering that SFDR and CSRD rest on reams of existing regulations already on the books governing a wide range of issues which are captured in ESRS metrics. This means that companies are ALREADY complying with some form of regulatory requirements, including disclosures. Much of the data required under CSRD (quantitative) is already being captured as part of regulatory processes across the world, including here in US. So the mantra: we don't have the data is not true.
What is new is the transparency to market actors vs regulators. And what is also new is the requirement of market actors to increase their expertise on the nuts and bolts of environmental and social regulations, technical terms, risk assessment/scientific evidence, measurement methods and requirements, monitoring, enforcement and other engineering and scientific activities. In short, the profession needs to upskill to tackle the REAL complexity of many topics covered in SFDR/CSRD - if we continue to hope that capital markets can drive change!
Troubling signs indeed, Hugh. I remember when the FSB set up the TCFD, I assumed that the big consultancies would come in and sort things like the proper and reasonable use of scenarios--perhaps build consensus around one or more transition scenarios that could serve as the tent pole for a range of investment strategies. That was...... naive? Wrong? Hard to say. But it didn't happen.
We've now had a range of market regulator interventions, with mixed results (and yes some good). But I think in aggregate the principals-based guidance has been too abstract to yield a material shift in reporting, which means changes have to be fought for in every trench and tree line.
It's basically taking existing the existing financial reporting framework, combining that with emissions data, to produce a suite of metrics on carbon related risks. And while it requires better emissions reporting to be more accurate, that's something that recently changes will likely improve. It holds the promise bridging the gap between how financial analysts evaluate companies and the often siloed approach they take to all things labelled "ESG".
Really interesting thoughts there Rob from your climate expert side of the fence. Will take a look at Carbon Quotient. Be great to catch up one of these days. All the best, Hugh
Some interesting thoughts and great links as usual! I think you need add in the political dynamics here in Canada and the US where corporates are sitting on hands and waiting for elections which could change the (macro) landscape significantly...
Yes, super important point Martin: we've got to be really understanding the political dynamics and working that in the right way. The ESG pushback is a reminder of how fragile we are in terms of presence/pushback. All the best, Hugh
Thanks Hugh. Great as always to see some structured thinking on this mess of industry/market/product trends. It's not just about one thing and you've captured the interplay well.
Thanks Melissa, much appreciated praise coming from you! All the best, Hugh
Interesting piece Hugh. Thanks for mentioning my Edinburgh Uni article. SFDR is an incoherent mess, and its not the only piece of regulation with unintended consequences - and all are draining energy and resources from effective ESG action.
On the bright side, financial flows to climate solutions continue to accelerate almost exponentially* as clean tech costs fall and geopolitical competition heats up. Perhaps the long-bemoaned disconnect between investor-ESG and real world change has a silver lining: real world change can happen even if ESG is in the doldrums. Would be good to catch up at some point craig.mackenzie@ed.ac.uk
*https://about.bnef.com/energy-transition-investment/
Cheers Craig!
Hi Craig,
How long do you think the increase in real would climate solutions will last if the push back against ESG is not checked. Thanks.
Hugh it might be a paradox that regulation goes up and investment action goes down, but it's no surprise to me. I have banged on (to deaf ears) about the growth of over regulation and about ESG being reduced to a compliance function. The problem is we have let the bureaucrats and the financial system types take over a system built on asset owner action.
Hi Fiona, agree to some extent, IMO regulation/incentivisation should majoritarily be for the activities, not the actors (who usually game it). All regs need to be as smart, pragmatic and political/lobby proof as possible.
But, sadly, we are where we are.
A through simplification and efficacity review is required on many different fronts...hard, but necessary work.
Hopefully one of the points I was trying to get across in my piece.
I think asset owners could be lead wagons on this: call it enlightened societal/self interest!
All the best, Hugh
I agree Hugh - up with regulation, down with action?! I think it bears remembering that SFDR and CSRD rest on reams of existing regulations already on the books governing a wide range of issues which are captured in ESRS metrics. This means that companies are ALREADY complying with some form of regulatory requirements, including disclosures. Much of the data required under CSRD (quantitative) is already being captured as part of regulatory processes across the world, including here in US. So the mantra: we don't have the data is not true.
What is new is the transparency to market actors vs regulators. And what is also new is the requirement of market actors to increase their expertise on the nuts and bolts of environmental and social regulations, technical terms, risk assessment/scientific evidence, measurement methods and requirements, monitoring, enforcement and other engineering and scientific activities. In short, the profession needs to upskill to tackle the REAL complexity of many topics covered in SFDR/CSRD - if we continue to hope that capital markets can drive change!
See:
https://www.circulaw.nl/European_green_deal.pdf
Troubling signs indeed, Hugh. I remember when the FSB set up the TCFD, I assumed that the big consultancies would come in and sort things like the proper and reasonable use of scenarios--perhaps build consensus around one or more transition scenarios that could serve as the tent pole for a range of investment strategies. That was...... naive? Wrong? Hard to say. But it didn't happen.
We've now had a range of market regulator interventions, with mixed results (and yes some good). But I think in aggregate the principals-based guidance has been too abstract to yield a material shift in reporting, which means changes have to be fought for in every trench and tree line.
In my view, the most under-appreciated concept in this space has been Carbon Quotient: https://www.carbonquotient.com
It's basically taking existing the existing financial reporting framework, combining that with emissions data, to produce a suite of metrics on carbon related risks. And while it requires better emissions reporting to be more accurate, that's something that recently changes will likely improve. It holds the promise bridging the gap between how financial analysts evaluate companies and the often siloed approach they take to all things labelled "ESG".
And it doesn't require any new regulation!
Really interesting thoughts there Rob from your climate expert side of the fence. Will take a look at Carbon Quotient. Be great to catch up one of these days. All the best, Hugh
Some interesting thoughts and great links as usual! I think you need add in the political dynamics here in Canada and the US where corporates are sitting on hands and waiting for elections which could change the (macro) landscape significantly...
Yes, super important point Martin: we've got to be really understanding the political dynamics and working that in the right way. The ESG pushback is a reminder of how fragile we are in terms of presence/pushback. All the best, Hugh