1489313 - Hogan Lovells FIS Horizons 2021 update - Flipbook - Page 25
Financial Institutions Horizons
25
Sustainable finance disclosures
Environmental, Social, and Corporate Governance (ESG) refers to the three central pillars
in measuring the sustainability and societal impact of an investment. In this briefing, we
consider recent regulatory measures that are focused on creating an equilibrium in the
financial services sector, by necessitating industry-wide harmonization on how ESG
factors are measured and incorporated into the existing governance and risk framework
of financial institutions.
ESG investing first appeared on the global stage
in 2004 when former UN Secretary-General
Kofi Annan wrote to over 50 CEOs of prominent
financial institutions urging them to integrate
ESG into the capital markets. Since then, ESG
has moved to the forefront of the political stage
as noted by the UN adoption of Sustainable
Development Goals and the subsequent landmark
signing of the UN Paris Agreement in 2016. The
recent avalanche of sustainable finance legislation
by governmental organizations marks a shift
from voluntary guidance to mandatory measures;
reflecting, in particular, the urgency of global
climate concerns. These regulatory measures are
focused on creating an equilibrium in the financial
services sector, by necessitating industry-wide
harmonization on how ESG factors are measured
and incorporated into the existing governance and
risk framework of financial institutions.
Greenwashing
Adopting ESG policies has demonstrated financial
benefits for firms, with evidence suggesting that
companies integrating sustainable practices
outperform companies that do not consider
environmental or social factors. In one metaanalysis, 88% of studies found that companies with
an ESG framework demonstrated better operational
performance, and 80% of studies showed a positive
effect on their stock price4. In addition, 71% believe
companies that focus on the environment and social
factors, will yield better returns.5
Following this increase in demand from investors
on ESG considerations, there is a risk that
products and services are being presented as more
environmentally friendly than they actually are – this
is known as “greenwashing”. Greenwashing is the
marketing tactic of falsely conveying or exaggerating
the environmental characteristics of a service or
product, with the intention to deceive investors.
Similar concerns arise about over-selling of products
focused on social benefits.
Investors and investment advisers are very alert
to the risks to them of green- (or social-) washed
investment products. If a product is not as green as
it was sold as being, there is a risk that the market
value of the product may be negatively affected.
Furthermore, such washing may mislead investors
as to the resilience of the underlying business and
assets to ESG-related risks. Many are improving their
due diligence and research capacities and demanding
better quality disclosure by corporates with clear and
measurable information about ESG performance.
Regulatory developments in the EU
The introduction of the EU’s Sustainable Finance
Disclosure Regulation 2019/2088 (SFDR)
and Taxonomy Regulation 2020/852 (TR) will
introduce objective ESG metrics and indicators.
The aim of these incoming Regulations is to
actively combat greenwashing and misleading
marketing claims, providing clarity to the endinvestor. Financial Market Participants (FMPs)
will be subject to rigorous reporting requirements
at both product and entity level to avoid falling
foul of the Regulations. Consequently, this is
likely to limit willingness of FMPs to engage in
greenwashing tactics for fear of being liable for
mis-selling.
Overview of the Sustainable Finance
Disclosure Regulation and the
Taxonomy Regulation
The development of a coherent framework for
sustainable investing is a priority on the EU’s
agenda for financial services regulation. To this
end, the SFDR and TR form part of the European
Commission’s action plan on sustainable finance.
4
Gordon L. Clark, Andreas Feiner and Michael Viehs, ‘From The Stockholder To The Stakeholder: How Sustainability Can Drive Financial
Outperformance’ [2014] SSRN Electronic Journal.
5
‘Millennials Drive Growth In Sustainable Investing - Morgan Stanley’ (Morgan Stanley, 2020)
accessed 2 November 2020.
