2020 OECD Business and Finance Outlook: Sustainable and Resilient Finance - Key Findings
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This presentation shows the key findings from the 2020 OECD Business and Finance Outlook which focuses on sustainable and resilient finance, in particular the environmental, social and governance (ESG) factors that are rapidly becoming a part of mainstream finance. It evaluates current ESG practices, and identifies priorities and actions to better align investments with sustainable, long-term value – especially the need for more consistent, comparable and available data on ESG performance. The COVID-19 pandemic has further highlighted the urgent need to consider resilience in finance, both in the financial system itself and in the role played by capital and investors in making economic and social systems more dynamic and able to withstand external shocks. Find out more at https://oe.cd/bizfin
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2020 OECD Business and Finance Outlook: Sustainable and Resilient Finance - Key Findings
- 1. OECD BUSINESS AND FINANCE OUTLOOK 2020 SUSTAINABLE AND RESILIENT FINANCE OUTLOOK LAUNCH | 29 SEPTEMBER 2020
- 2. 2 BUSINESS AND FINANCE OUTLOOK 2020 OVERVIEW 1. Drivers of sustainable investment and financing 3. Policy priorities for better market outcomes 2. ESG tools to support sustainability and resilience Focus on the incorporation of Environmental, Social and Governance (ESG) considerations:
- 3. 3 1. DRIVERS OF SUSTAINABLE INVESTMENT AND FINANCING ESG COMPANIES GROWING, LARGE MARKET SHARE Source: Refinitiv, OECD calculations Share of market capitalisation by ESG scoring companies by region, 2019 0% 5% 10% 15% 20% 25% 2013 2014 2015 2016 2017 2018 2019 World United States European Union Japan Share of market coverage by ESG scoring companies by region, 2013-2019
- 4. 4 1. DRIVERS OF SUSTAINABLE INVESTMENT AND FINANCING RISING DEMAND TO INCORPORATE ESG FACTORS Investors: better use of non-financial information to improve decision-making and long-term risk adjusted returns. Fiduciaries: e.g. boards and asset managers, incorporating sustainability considerations to meet their duty to investors. Banks: enhance due diligence in lending practices, and strengthen the integrity of sustainable financial instruments Social expectations: of better business conduct and clear positive role for business in society Covid-19: underlined where and how systems are vulnerable to risks posed by future shocks and tail risks
- 5. 5 2. TOOLS TO SUPPORT SUSTAINABILITY AND RESILIENCE INCONSISTENT DATA ON COMPANY ESG PERFORMANCE Correlation of S&P 500 ESG ratings by different ESG score providers, 2019 Average correlation between different ESG ratings for the same company: 0.4 Note: Providers’ names in the legend correspond to the Y axis when at the left and to the X axis when at the right. Source: Bloomberg, MSCI, Refinitiv, OECD Staff calculations Bloomberg MSCI MSCI Refinitiv ESG Rating Line of perfect positive correlation (+1.0)
- 6. 6 Selected ESG ratings and issuer credit ratings by sector in the United States, 2019 Note: Sample of public companies selected by largest market capitalisation to represent different industries in the United States. The issuer credit ratings are transformed using a projection to the scale from 0 to 20, where 0 represents the lowest rating (C/D) and 20 the highest rating (Aaa/AAA). Source: Refinitiv, Bloomberg, MSCI, Yahoo finance, Moody’s, Fitch, S&P; OECD calculations. 2. TOOLS TO SUPPORT SUSTAINABILITY AND RESILIENCE WIDE VARIATION BETWEEN ESG RATINGS 0 10 20 30 40 50 60 70 80 90 100 ESG Rating Provider 1 Provider 2 Provider 3 Provider 4 Provider 5 Basic Materials: Ecolab Cons. Cyclicals: Amazon Cons. Non-Cyc.: Walmart Energy: Exxon Mobil Financials: Berkshire H. Healthcare: Johnson& J. Industrials: Boeing Technology: Microsoft Teleco: Verizon Utilities: Nextera Energy 0 2 4 6 8 10 12 14 16 18 20 Issuer Credit Rating Moody's Fitch S&P Rating (numerical scale)Rating (numerical scale)
- 7. 7 0 1 000 000 2 000 000 3 000 000 4 000 000 5 000 000 6 000 000 7 000 000 0-1 1-2 2-3 3-4 4-5 5-6 6-7 7-8 8-9 9-10 CO2 Emissions Provider 1 Provider 2 Provider 3 CO2 emissions by E pillar score for a global set of companies across the three providers1 - 0.20 0.40 0.60 0.80 1.00 1.20 1.40 0-1 1-2 2-3 3-4 4-5 5-6 6-7 7-8 8-9 9-10 CO2/Revenues Provider 1 Provider 2 Provider 3 Note: 1) Note: Average tonnes of estimated CO2 emissions (Scope 1 and Scope 2, as reported by Refinitiv’s methodology for estimating emissions) by E pillar deciles for different providers. 2) Average tonnes of estimated CO2 emissions divided by Revenues, by E pillar deciles for different providers. Source: Bloomberg, MSCI, Refinitiv, OECD calculations CO2 emissions adjusted for revenue by E pillar score for a global set of companies across the three providers 2. TOOLS TO SUPPORT SUSTAINABILITY AND RESILIENCE ESG A WEAK PROXY FOR CARBON EMISSIONS EXPOSURE Environmental score Environmental score
- 8. 8 3. POLICY PRIORITIES FOR BETTER MARKET OUTCOMES MAKING ESG PRACTICES FIT FOR PURPOSE 1. Global, mandated, auditable ESG data reporting framework Minimum data points for ESG disclosure for greater transparency and standardisation of core elements of ESG data disclosure 2. Strengthen the regulatory environment Regulatory guidance on data disclosure, aappropriate labelling of ESG products, defining long-term financial materiality to capture slower moving environmental and social risks. 3. Incorporate ESG into government activities Better ESG practices and disclosures as enterprise owners, customers and infrastructure investors – government should lead by example. 4. Leverage existing policy instruments and standards OECD instruments on corporate governance and the governance of state owned enterprises, responsible business conduct a guidance due diligence of institutional investors and lenders.
Hinweis der Redaktion
- 11 minutes (1,170 words) Secretary General, Deputy Secretary of State, ladies and gentlemen After those fitting introductions, I have the pleasure to present the key findings of this year’s OECD Business and Finance Outlook on sustainable and resilient finance. This is a report rich in analysis, discussion and guidance, which would be impossible to cover completely in the time we have – so I will focus on three main themes: The drivers behind the incorporation of sustainability considerations into equity and debt markets – and I will focus primarily on the incorporation of environmental, social and governance, or ESG, considerations. How currents tools and practices do – or don’t – support investors to do this. Priorities to support better market outcomes going forward.
- The market has coalesced around ESG analysis as the primary means to incorporate sustainability and resilience considerations into investment and financing – that is the measurement and rating of companies, portfolios and assets against specific material non-financial risk factors. I want to start by giving a sense of scale in the market. While the share of public companies with some kind of ESG rating worldwide is low, at around 10%, it is growing steadily as we see here on the left – particularly in the United States. However when we look at the market capitalisation of companies with ESG scores, on the right, 78% of total global market capitalisation has an ESG score attached, with: 95% in the US 89% in the EU and 78% in Japan.
- What’s driving this growth? This Outlook details the growing appreciation across financial market participants that non-financial ESG risks and opportunities can and do have a material impact on long-term value. To give 4 examples: Investors are looking to better use of non-financial information like ESG factors to guide asset allocation decisions to improve long-term risk adjusted returns. Fiduciaries like boards and asset managers are increasingly incorporating sustainability considerations into decision-making, strategy and risk management to meet their duty to investors. From the debt side, banks are seeking to enhance their due diligence in lending practices, and strengthen the integrity of instruments like green bonds. Businesses are also adapting to shifting expectations – from the community but also many governments – around business conduct and the need to play a more visibly positive role in societies. Orienting investment activities towards the long term is a key means to meet stakeholder expectation – and avoid reputational risks. And of course, the Covid-19 pandemic has underlined where businesses and markets are vulnerable to future shocks and tail risks – that is, low probability, high severity events. To be clear: the incorporation of ESG factors for the vast majority of investors is not about social activism or the pursuit of specific values – and for fiduciaries it would not be appropriate to do this with other people’s money. It is about the consideration of material, non-financial risks, which is a fundamental part of investment and asset selection.
- When we look at the tools investors and other financiers have to assess ESG risks and opportunities, we see a lot of recent progress – particularly from ratings agencies providing ESG scores for the companies, on which many investors, lenders and index providers rely. We also find some significant shortcomings. In particular, while there is a wealth of ESG data out there, it is not consistent, comparable or easily verifiable. We mapped the correlation between ESG ratings for the same company across three different ratings providers, as shown on this chart. If companies received similar ESG ratings between providers, these data points would line up close to this middle line – but as we can see there is wide variation. Companies ranked top by one provider get much lower scores from others, and in all the correlation is weak, at just 0.4 Our analysis puts this high level of variation down to the wide range of methodologies, metrics, weightings and a level of subjective judgment within ESG ratings.
- There is nothing wrong with different methodologies. But we would expect ratings empirically measuring the same ESG risk factors in the same company to reach similar conclusions, as ratings agencies do in credit scoring – and that’s what is shown on this slide. On the left, we see a wide variation of ESG ratings from different providers for a sample of companies. On the right we have credit ratings from different providers for those same companies – which we can see are much more closely aligned. With such a wide variation in ESG scores, the link between materiality and ESG factors is also unclear. Though ESG indices have performed well relative to mainstream ones since the start of the pandemic, we find little evidence to suggest strong ESG ratings are linked to over-performance. This suggests that ESG practices are not supporting enhanced consideration of material risks. It also makes it hard for fiduciaries to explain and justify decisions informed by ESG considerations.
- Our Outlook illustrates these issues through detailed analysis of the Environmental component of ratings, and specifically carbon emissions. When we looked at three major ESG ratings providers, in two cases the higher the environmental score awarded to a company, the higher carbon emissions were for that company, as we see on the left. When we adjusted for revenue there was still wide variation between providers, and one provider still had notably higher level of emissions in higher environmental-scoring companies, as we see on the right. Clearly, we cannot rely on ESG approaches in their current form to: Manage carbon exposure in portfolios – though many private investors do; or Green the financial sector – as many pubic institutions are seeking to do. When it comes to ESG ratings and disclosures more broadly, investors and financial decision-makers cannot rely on current data to accurately compare material ESG risks and opportunities between companies, price those risks, and allocate funds accordingly. We found this over and over again in different contexts, for boards, institutional investors, in infrastructure financing and for banks. On a side-note, I want to say that we did not look to single out ratings agencies – it’s just that this is where the data lies, which is actually a testament to how far they’ve come on ESG data and disclosure.
- Better incorporation of ESG factors has huge potential to align incentives with long-term value, and in doing so better align financial market activities with sustainability goals and community expectations. But current ESG practices are falling short, and the challenges I’ve described could eventually undermine confidence in their efficacy, and squander this potential. Policymakers must step up to make ESG practices fit for purpose. First, the headline priority is working together towards a global, mandated, auditable ESG data reporting framework – to drive better transparency and standardisation of core elements of ESG disclosure. This can be flexible and adaptable to national circumstance, but we need a minimum set of data points to track and compare ESG performance. Voluntary industry standards will not address these issues. Second, we can strengthen the regulatory environment – including regulatory guidance on data disclosure, appropriate labelling of ESG products to ensure their link to materiality is clear, and defining long-term financial materiality to better capture slower moving environmental and social risks. Part of this is greater engagement between the financial industry and the public sector. Third, governments can already incorporate better ESG practices and data disclosures into their own practices, for example as enterprise owners, customers and infrastructure investors – and they should be leading by example. Finally, there are existing policy standards and guidance that could already improve practices if fully implemented, and which form a strong basis for reform going forward. These include OECD instruments on corporate governance and the governance of state owned enterprises, responsible business conduct in supply chains and guidance on due diligence for institutional investors and lenders. These priorities are exactly what the OECD will be pursuing in the time ahead. Now stay with us as we delve deeper into these issues with our panel – and I’ll now hand over to our panel’s moderator, Antony Currie, Associate Editors of Reuters Breakingviews.