The CSRD will require companies listed on regulated markets in the European Union to publish detailed information about how they relate to the environment. It is a positive step towards improving the functioning of a multitrillion-dollar market known as ESG, which has long been troubled by inconsistencies in data quality, reporting standards, and methods used to generate company's ESG ratings.
There are three ways the EU rule will try to tame the Wild West. To introduce greater quality and consistency to their reporting, companies need to meet mandatory EU sustainable standards. Audit firms' track records show that vigilance will be needed in this new area. Companies must also report on how their business impacts the environment, society, and governance if they want to be considered a good corporate citizen. It should be easier for investors, regulators, and consumers to reward and punish companies based on their performance.
Risk for investors and companies is created by the lack of transparency, explainability, and accountability. The US Securities and Exchange Commission fined an investment unit of BNY Mellon bank 1.5 million dollars for misstating ESG information. The fund unit ofDeutsche Bank is being investigated.
There is likely to be more regulatory scrutiny in the years to come. Gary Gensler, the head of the SEC, felt it was necessary to post a warning on social media last year that companies may be "greenwashing" and that there is a lack of consensus over what ESG investing really means. Esg is a scam. He said it has been weaponized by social justice warriors after S&P 500 removed his electric-vehicle company from its ESG index. S&P 500 defended its decision by pointing out that there were allegations of racial discrimination at the factory. Does it make sense to rate companies on environment, society, and governance separately? Are the three ESG factors related?
The questions have been around for a long time but became more urgent after Russia invaded Ukraine. The agencies were asked if they should continue shunning weapons manufacturers since they make products that are deliberately designed to harm and kill humans, or if they should increase the ratings of those companies. Critics argued that the unelected people who work at rating agencies should not be responsible for ethical considerations. Many company leaders, employees, investors, and consumers don't agree with the view that elected representatives have of business ethics. As companies and ratings agencies think through the long-term implications of Russia's invasion of Ukraine and other risks, the debate will become more intense.
There will be more efforts to regulate ESG in the years to come. The SEC proposed a rule last year that would require public companies to report their climate related risks. Even if this doesn't happen, companies will start to feel the pressure from central banks. In order to align their portfolios with the Paris Agreement to limit global warming to 2 degrees Celsius, the European Central Bank, the Bank of England, and the Riksbank have all announced plans to require higher standards of climate reporting. The International Financial Reporting Standards Foundation, which sets global accountancy standards, has created a new International Sustainability Standards Board that is working to set global standards. The Wild West may not last very long.
All Rights Reserved © 2024
