ESG credibility faces ’make or break’ moment - report

Environmental, social and governance investing and reporting is facing existential questions associated with a lack of standardisation, regulation and common purpose, according to a new study published by EY and Oxford Analytica.

The report – The emerging sustainability information ecosystem – suggests that rising inflation and the war in Ukraine are compounding these challenges. However, it adds that growing allegations of greenwashing have become one of the major challenges to ESG credibility and success. Addressing these challenges and building trust in the system is the responsibility of the many players who shape the sustainability ecosystem if ESG is to be seen by stakeholders as on a par with the more established ecosystem of financial reporting.

The report argues that there has been a lack of agreement on what ESG should include, how to apply agreed metrics and how best to use available data. To build greater trust in ESG, the report outlines five core areas that must be addressed including: increased transparency over ESG ratings; increased understanding of the varying uses of sustainability information; independent assurance alongside enhanced reporting standards and rigor, similar to financial reporting; the development of agreed sustainable finance taxonomies to help eliminate confusion on what is considered sustainable and what is not; and lower barriers to entry for those from emerging economies.

Steve Varley, EY’s global vice chair for sustainability, said: “The extraordinary growth of the ESG movement is threatened by a lack of alignment and agreement on foundational concepts and, in worst cases, growing claims of greenwashing. ESG is facing a make-or-break moment and requires a whole system approach to addressing these issues. Sustainability is everybody’s business and more work must be done to encourage open collaboration and trust-building among those who shape the industry.”

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