The environmental, social, and governance framework was created with two objectives: to help companies manage environmental and social risks — do no harm — and incentivize them to contribute greater social and environmental impacts — do good. To date, it has been used as a risk management tool at best and a compliance obligation at worst. As a result of cumbersome reporting systems and problematic applications of the framework, the very essence of ESG is at risk — and it is key that E, S, and G are not separated.
Globally, firms are required to report on over 600 ESG indicators, which has given rise to corporate “greenwashing” among other scrutiny. ESG factors are complex and continuously evolving. Rather than attempting to boil ESG factors to a single rating, we should recognize that many investors crave a more sophisticated and nuanced approach. We need to explore an integrated approach for sustainable finance that incorporates ambitious yet feasible ESG approaches, thus realizing the potential for ESG to drive positive social impacts while simultaneously achieving economic and climate objectives.
In 2021, sustainable finance volume surged past $1.6 trillion as the market responded to investors’ appetite for financial instruments with ESG goals. Growth was driven by global ESG funds, which saw a record $649 billion in investments by end of November 2021, compared to an all-time high of $179 billion of official development assistance in 2021. One can only imagine the transformational role ESG can have if these investments were put toward financing initiatives and programs that truly advance ESG commitments...
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