Rethinking the governance of ESG

Theme 10

Rethinking the governance of ESG

The growing demand for truly sustainable investments masks some tensions. While there is some pushback against ESG, for example legislation in some US states threatening businesses with missions like cutting carbon emissions or DEI (diversity, equity and inclusion), there are also increasing calls for better ESG standards, greater transparency, and rejection of greenwashing. Governments, recognizing the importance of stronger ESG governance, are adopting new regulations to govern standards and reporting.

Signals

Global ESG (environmental, social and governance) assets may reach $53 trillion ^[137] by 2025. Demand for sustainable investments is exceeding supply ^[138]. 550 financial institutions have joined the Glasgow Financial Alliance for Net Zero ^[139]. ESG-labelled bonds made up 16% of global EUR- and USD-denominated international syndicated bonds issued in 2022, up from 14% in 2021. The number of companies (in 62 countries) appointing chief sustainability officers ^[140] jumped threefold in 2021. An Australian energy firm was fined for greenwashing ^[141].

There has been some backlash against ESG, like Florida pulling $2 billion in assets ^[142] from BlackRock to protest its support for ESG, climate action and stakeholder capitalism; and Vanguard, the world’s second largest asset manager, resigning ^[143] from the Net Zero Asset Managers Initiative.

Several recent policies create significant new incentives to invest in renewables and sustainability, like the US Inflation Reduction Act, the EU’s cross border tax on carbon ^[144] and the global convention on biodiversity target to protect 30% of the planet ^[145] for nature.

Regulations governing ESG are highly fragmented ^[146]. There are over 600 ways to assess corporate ESG activity, but no global, standardised corporate disclosure requirements. While there is more data available for verifiability, ESG ratings providers all use different methods to rate companies’ performance, so investors find the ratings hard to interpret. Indeed, investors identify lack of standardisation across ESG bond ratings as the top barrier to investment ^[147].

Progress towards improving standards includes the International Sustainability Standards Board’s proposed global standards ^[148] for ESG reporting; an EU directive ^[149] that significantly expands ESG reporting obligations; and the G20 Sustainable Finance Roadmap, which encourages nature- and biodiversity-related disclosures. The UN Sustainable Stock Exchanges Initiative ^[150] is working to improve ESG disclosure ^[151] in emerging markets. Mongolia issued guidance on sustainability ^[152] reporting for Mongolian companies.

Trends

ESG regulation in the spotlight
Increasing consumer demand for sustainability
Growing demand for new forms of governance

Illustrative Signals

International Sustainability Standards Board proposes global standards for ESG reporting
Companies appointing Chief Sustainability Officers in 62 countries trebled in 2021
Florida pulls $2 billion in assets from BlackRock to protest its support for ESG
UN Sustainable Stock Exchanges Initiative works to improve ESG disclosure in emerging markets

So what for development

Major investors, like pension funds, might steer clear of ESG-aligned companies - either because mandated to do so, or because they do not see ESG as a useful risk mitigation strategy. ESG’s opaque framework and inconsistent regulations are costly to navigate, and undermine trust in ESG.

How this will pan out remains to be seen. There are plenty of more positive ESG signals – investor demand, government interest, changing values – that suggest fertile ground for improved standards and accountability. Development of clear, verifiable, standardised metrics is important – which the proliferation of data may complicate, as well as help.

Are we failing to communicate the real value of ESG? The term has become fraught with so many shades of meaning that the simple “good business” message is often lost. Yet as the Business Commission on Sustainable Development notes, “Contributing to the SDGs offers a compelling growth strategy ^[153] for businesses.”

Achieving gender equity ^[154] alone could increase the size of the global economy by 26%. Gender equality-focused bonds ^[155] are growing, albeit from a low base.

Something to watch: how the data and tech sectors respond to new incentives to invest in sustainability, perhaps identifying business startup opportunities fuelled by tax credits, or new demand for data collection and verification as ESG standards converge?

Explore more themes

illustration of a lonely person who is close to a crowd

Theme 11

The changing face of altruism

Charitable donations are increasing, with new ways of giving and, in some cases, more emphasis on long term results. Meanwhile development needs more flexible, risk-tolerant, longer-term funding, especially with ODA under pressure. While philanthropy is only a part of the funding available for sustainable development, can it inspire a more risk-tolerant approach that looks to the interests of future generations?

Growing youth bulge in many developing countries Shifting nature of work Social contracts under pressure

Theme 12

Why aren't we talking about a social recession?

With the global economy on the brink of recession, we are in the midst of a social recession that is equally consequential for societies and economies but is much less factored into calculations about our future: loneliness, mental health declines, stress in the workplace and trust at an all-time low.

illustration of people walking on one path

Theme 13

The looming job crisis

Major economies are not replacing their populations fast enough to stave off future labour shortages in key industries, while in Africa, a rapidly-growing young population means millions of new jobs will be needed. Today’s labour policies will determine how successfully countries meet these challenges, which will require them to create high quality jobs and invest in the education and training workers need to fill them.