ESG adoption is picking up, but ‘Framework’ is the elephant in the room

Synopsis: As the inflows into the ESG funds grow, addressing the question of framework becomes crucial. With multiple ESG frameworks in the market, the lack of a standardized structure and its potential implications are making their presence felt as companies and countries are adopting multiple frameworks to lure investors. For the time being, ESG disclosures are more of a voluntary submission rather than regulatory. This creates a scenario where entities can label themselves as sustainable by self-curating a framework that would be at best ‘inappropriate’ or at worst, misrepresent the company’s position on ESG parameters. In recent times, even emerging and frontier markets such as Oman and Saudi Arabia have begun to formulate separate ESG frameworks to attract international investors as the ESG trend serenades the globe. Considering its popularity among the millennials, PepsiCo also recently launched pep+, an initiative that looks at overhauling the company’s business to incorporate sustainability as a core commitment. Similarly, Mastercard has launched Global Sustainability Innovation Lab. Based in Stockholm, Sweden, the Lab will serve as a global research and development center for climate-conscious digital products and solutions, and will also support impact-driven start-ups and customers. There are interesting ESG related developments in the capital markets as well. Following on the heels of its victory over ExxonMobil, hedge fund Engine no 1 also launched a ‘Total Value Framework’ that looks at a variety of factors to gauge potential ESG risks or growth a company faces. While the initiatives are commendable, the issue lies in the same old aspect of data quality and data interpretation in the absence of a universal framework. Going forward, it is almost a given that there will be more initiatives from accounting bodies and regulators focused on ESG standardization which will play a big role in how ESG investing evolves in the future. It will be interesting to see how this plays out.