Clarity will bring much needed confidence in ESG assessments
Confidence in ESG ratings is vital if we are to place our trust in an organisation’s environmental, social and governance credentials.
The lack of clarity on how organisations are performing - and how that is measured - has been problematic for some time. Barely a week goes by without distracting accusations of greenwashing that undermine the validity of ESG claims. Despite influencing trillions of pounds of investment, there is a marked lack of regulation on how organisations create ESG criteria and rate companies against them as they are not generally covered by markets and security regulators. At a time when the issue features so prominently in corporate communications and investor information, there is no standardised framework to gauge accuracy or to establish where the gaps are. At best the situation is muddled, at worst organisations, investors or the public simply start to disengage from these crucial issues. As a result, confusion rules – for businesses trying to do the right thing, for investors considering how to integrate ESG considerations into the investment process and for the public who have ever greater expectations of the social impact that businesses should have.
This lack of transparency is why I have previously called for a review of the way in which the sustainable ratings industry is assessed (Let’s fix our ESG transparency problem by keeping things simple). Last year HM Treasury finally consulted with industry about regulating providers and, earlier this year, the Financial Conduct Authority (FCA ) launched a voluntary code of conduct for ESG ratings and data products providers.
So it is encouraging that the Chancellor, Rachel Reeves, has now announced that she will take steps to improve clarity in the ESG ratings industry. As part of a new mission-led government which has equality of opportunity at its core, that is very welcome news. She has confirmed that new legislation is needed and will bring forward a bill next year to regulate the agencies that evaluate the environmental, social and governance performance of companies, amid a global drive to increase transparency and a commitment to driving growth in the UK.
The Chancellor has been driven by concerns about the sustainability of the finance sector in particular which would be better supported by a more transparent ratings process. She will also be considering the impact that opaque criteria have on investment in UK defence companies. Since I first highlighted this issue, geo-political insecurity has increased, with conflict in the Middle East now added to that of the Russia-Ukraine war and threatening to spread across a far wider area. The need to support our defence sector and protect our national values, while providing urgently needed clarity, should be paramount. Many are also some of the largest employers in areas of the country that have often traditionally been left behind, including in Barrow in Furness which I represented as its Member of Parliament, with the sector offering brilliant training and apprenticeship opportunities and an emphasis on extending them as much to women as to men, in a world-leading high-tech industry.
There is also a need to extend the debate to organisations’ supply chains, which can be huge. Alongside the social impact every organisation can deliver, ensuring that what they buy creates additional benefits for society is essential. Reform of social value procurement is long overdue. The Government made its commitment to social value clear during the election campaign and has promised to streamline bidding processes while also enforcing greater transparency. It has also announced a Social Value policy role in the Cabinet Office and plans to establish a Social Value Council to drive best practice and accountability. Embedding clear processes will not only help to generate local and national economic growth but also promote business as a force for good.
Working with some of our most committed purpose-led businesses in the country through the Purpose Coalition, I’ve seen first-hand the genuine social impact that they have been able to achieve by identifying issues that affect their staff, customers and communities and making those priorities their own. Our partnerships enable us to share best practice while also coming together to help a forward-looking agenda which includes offering solutions. As part of a wider collaborative approach to breaking down the barriers to opportunity and boosting social mobility, supported by a shared framework of key life stage goals, they have been able to make a real difference. Tracking and evaluating their progress, including in measuring socioeconomic diversity, has allowed them to focus on where they can best make a difference and on those that need the most support.
There is now real momentum for regaining trust and credibility in the ESG ratings process and the proposed legislation will be awaited with anticipation. Our work at the Purpose Coalition proves that simplicity and purposeful intent can deliver tangible change and I hope those elements continue to drive the ambitions of business and government.
