OECD Report Outlines Challenges Facing ESG Investing

CIO | Oct 19, 2020

ESG opportunities and challenges - OECD Report Outlines Challenges Facing ESG InvestingStudy finds ‘little evidence’ of consistent ESG over-performance in recent years.

A new report from the Organization for Economic Co-operation and Development (OECD) said that while “loosely defined” metrics seem to indicate that environment, social, and governance (ESG) investing provides superior returns, “a more in-depth analysis suggests that financial performance based on ESG ratings is mixed and there is little evidence of consistent over-performance in recent years.”

The 2020 edition of the OECD’s annual business and finance outlook focuses on the ESG factors that it said are “rapidly becoming a part of mainstream finance.” The report evaluates current ESG practices and identifies priorities and actions to align investments with sustainable, long-term value, such as the need for more consistent, comparable, and available ESG performance data.

“ESG ratings and investment approaches are constructive in concept, and potentially useful in driving the disclosure of valuable information on how companies are managed and operated in reference to long-term value creation,” said the report. However, it added that “current market practices, from ratings to disclosures and individual metrics, present a fragmented and inconsistent view of ESG risks and performance.”

The report said that while institutional investors looking to manage ESG factors often rely on external service providers of indices and ratings, the lack of standardized reporting and low transparency in ESG rating methodologies “limit comparability and the integration of sustainability factors into the investment decision process.”

The wide discrepancy in ESG practices is among the biggest challenges in assessing ESG performance, said the report. It also said ESG practices are often combined with other investment strategies that could include a thematic focus, which makes it difficult to determine which particular ESG approaches are successful in generating long-term value.

“Current approaches to ESG assessments and ratings appear highly inconsistent and incomparable, and risk undermining their potential value,” said the report.

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RESOURCES

Report:  ESG Investing: Practices, Progress and Challenges (OECD)

Overview:  While the mainstreaming of forms of sustainable finance is a welcome development, the terminology and practices associated with ESG investing vary considerably. One reason for this is that ESG investing has evolved from socially responsible investment philosophies into a distinct form of responsible investing. While earlier approaches used exclusionary screening and value judgments to shape their investment decisions, ESG investing has been spurred by shifts in demand from across the finance ecosystem, driven by both the search for better long-term financial value, and a pursuit of better alignment with values. This report provides an overview of concepts, assessments, and conducts quantitative analysis to shed light on both the progress and challenges with respect to the current state of ESG investing. It highlights the wide variety of metrics, methodologies, and approaches that, while valid, contribute to disparate outcomes, adding to a range of ESG investment practices that, in aggregate, arrive at an industry consensus on the performance of high-ESG portfolios, which may remain


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