ESG Regulation: The carrot and stick of green recovery
Earlier this year city centres emptied, long-distance travel slowed, industries came to a halt, and the planet enjoyed a carbon reprieve of sorts. The environment seems to be the coronavirus’s only immediate “winner,” and those of us with an interest in regulation began asking: what effect is the pandemic going to have on legislative commitments to encourage further flow of capital towards greener assets?
One could, rather fairly, intuit that the economic pressures brought forward by the pandemic would force governments to leave companies alone. The gloom of prospective hikes in debt costs, scrambles for cash to secure liquidity, and higher taxes all stand in the way of an easy recovery. What kind of government, we may ask, would want to burden the economy further with ESG fines and mandatory requirements?
Such presumptions, however, began to shatter as the regulators did not spare struggling companies from hefty fines. In October, the ICO levied £20 million – its biggest-ever GDPR fine – against British Airways for failing to protect their customers’ data against unauthorised access.
Of course, the British Airways penalty was initially announced to be £183 million, but out of the tremendous (89%!) reduction, “only £4m of that reduction has been specifically attributed to Covid-19.” This gives us a good quantitative indication of exactly how little the regulators are prepared to discount under the circumstances we all are facing.
The “stick” clearly remains in the watchdogs’ hand, so where is the “carrot”? Well, it comes in four types: labelling, disclosure, risk management, and suitability. Jurisdictions are racing to provide access to data and simplify relevant terminology, which should help investors account for the unpriced risks of an asset.
The EU is standing at the helm of the regulatory push, with the following pieces of legislation on the agenda:
At a minimum, the UK is likely to mirror the EU initiatives listed above, to ensure consistency of standards across supply chains which extend outside of its borders. Mounting pressure to get their environmental affairs in order ahead of COP-26 makes it all the more likely that the UK will go even further, in an attempt to take over the position of ESG stewardship. Recent announcements all point in the same direction:
The proliferation of regulatory activity around ESG suggests an unprecedented level of agreement that making societies resilient to system shocks will pay off. However, it is still uncertain whether the carrot will turn out as sweet as the legislators are hoping. Even though the regulation reviewed here intends to eliminate “greenwashing” and enact full transparency, analysts and investors will unavoidably be flooded with large volumes of standardised, and not always meaningful, information. This, in turn, will place a premium on one’s ability to effectively communicate an ESG narrative amid the sea of compliance-oriented, box-ticking disclosure forms.
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