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Private sector efforts and initiatives on environmental, social and governance (ESG) factors

Sustainable development goal (SDG) 12 encourages companies, to adopt sustainable practices and to integrate sustainability information into their reporting cycle. The Addis Agenda takes this further and encourages greater accountability by the private sector to embrace business models that have social and environmental impacts, and that operate sustainably. Private sector efforts and initiatives are an integral part of the Addis Agenda, and essential to the achievement of the 2030 Agenda.

In addition, there is a growing recognition in the finance community that the way corporates manage environmental, social and governance (ESG) factors—such as carbon emissions, standards on labour, and internal procedures to fight corruption—impacts financial returns. This explains the growing trend in investment strategies that take these factors into consideration (see the 2019 Chapter III.B of the Financing for Sustainable Development Report).

While sustainable investments historically started with exclusions, the latest data shows that ESG integration and engagement are gaining strong traction in some countries, while norm-based and exclusionary screening are on a declining trend, although the latter remains a dominant strategy in terms of assets.

Reporting
Corporations have progressively incorporated sustainability elements into their reporting. Such growing adoption reflects a range of policy measures and regulations across countries.Stock exchanges also encourage ESG disclosure through a variety of incentives (figure 2), as promoted by the Sustainable Stock Exchanges Initiative. However, there is a lack of consistency in reporting metrics, reflecting the lack of internationally recognized standards in sustainability reporting. Several agencies have developed guidelines to bring more coherence to corporate reporting, including the United Nations Conference on Trade and Development (UNCTAD) Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) and the Global Reporting Initiative (GRI).

Reporting on environmental, social and governance impacts is a first step in better aligning private investment with sustainable development. More than 92 percent of the world’s 250 largest companies report on their sustainability performance in one form or another. In addition, more than 2,000 businesses in 90 countries adhere to the guidelines of the independent standards organization, the Global Reporting Initiative (GRI). Over the past 18 years, there has been a sharp increase in the number of companies producing sustainable reports in accordance with GRI guidelines.

Benchmarking

At present, there is no effective mechanism for individual investors, civil society and governments to hold companies to account for investing in and promoting good corporate performance on sustainable development. Consequently, there is not enough pressure on companies, either from investors or society at large, to improve their corporate sustainability performance. As a result, there has been a proposal is to create a set of publicly available, corporate sustainability benchmarks that rank companies on their performance across a range of indicators such as climate change, gender, access to health care and other key aspects of the SDGs. This would provide transparent information to investors and civil society and investors. To address this gap, the “World Benchmarking Alliance” has been established.

Principles

The Principles for Responsible Investment (PRI) are six voluntary and aspirational investment principles that offer a menu of possible actions for incorporating environmental, social and governance (ESG) issues into investment practice. Its 6 principles include pledges by signatories to: i) incorporate ESG issues into investment analysis and decision-making processes; ii) be active owners and incorporate ESG issues into their ownership policies and practices; iii) seek appropriate disclosure on ESG issues by the entities in which they invest; iv)  promote acceptance and implementation of the Principles within the investment industry; v) work together to enhance their effectiveness in implementing the Principles; and vi) report on their activities and progress towards implementing the Principles.

The PRI Principles complement the UN Global Compact, which asks companies to embed in their strategies and operations a set of 10 universal principles in the areas of human rights, labour standards, the environment and anti-corruption, and to report on their implementation. They are also a natural extension of the work of the UN Environment Programme Finance Initiative, which has helped sensitise capital markets to the importance of environmental and social issues.

Principles have also been developed for the financial sector. For example, the Equator Principles is a set of 10 principles for financial institutions, for determining, assessing and managing environmental and social risk in project finance. In the insurance industry, the UNEP FI Principles for Sustainable Insurance, launched at the 2012 UN Conference on Sustainable Development, serve as a global framework for the industry to address environmental, social and governance risks and opportunities. The International Capital Markets Association (ICMA) has also developed principles around Green Bond to promote integrity in the development of the green bond market by clarifying the approach for issuance of a green bond.

Impact investments

Impact investments are investments with the intention to generate social and environmental impact alongside a financial return. The growing impact investment market provides capital in sectors such as sustainable agriculture, clean technology, microfinance, and affordable and accessible basic services including housing, healthcare, and education. Impact investments are undertaken by a range of organisations including institutional investors (fund managers, pension funds and insurance companies), development finance institutions, banks and foundations.

Given that impact investing is a relatively new approach, the market size for it has not yet been fully quantified. However, figures supplied by the Global Impact Investing Network (GIIN) indicate that the market is expanding. The Financial Times has also been conducting a yearly “Investing for Global Impact” survey for several years now and the OECD has an initiative on Social Impact Investment.

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