Despite a noticeable increase in the scale and speed at which environmental, social, and governance factors are now driving investment decisions, some gaps remain.

The Global Public Investor survey by the think tank Official Monetary and Financial Institutions Forum, which sampled 102 institutions overseeing a combined $7 trillion in assets, indicated acceleration due to the coronavirus pandemic but with different uptake by pension funds, sovereign wealth funds, and central banks.

According to the OMFIF’s research, pension funds led the way, followed by sovereign funds and central banks who cited that issuing green bonds remained their most popular ESG option. The survey also found that there were still gaps whereby nearly 60 percent of global public investors did not use ESG benchmarks and only 8 percent had their own bespoke benchmarks.

The lack of standardized ESG benchmark accounting principles has raised questions as to whether ESG participants were fully pricing-in the long-term implications of climate change.

One reason was that, when choosing assets that aligned with their values, some investors relied heavily on brand perceptions and PR rather than actual company policy on ESG-related issues.

As ESG encapsulates the triple effect of environmental, social, and governance issues, strengths in one area could overshadow weaknesses in others. The stakes are high for all participants as overall sustainable investing accounts for a third of all global assets was projected to reach $53 trillion by 2025.

Regulators are aware of this deficiency, and many are busy rolling out numerous ESG disclosure and reporting recommendations to help markets avoid green-washing (paying lip service to ESG principles such as climate change) and to ensure the long-term risk management of sustainability factors.

Some regulators have been more proactive than others. In June, the European Commission launched the EU Taxonomy Compass. The online tool, accompanied by a downloadable excel file, digitizes the contents of the taxonomy, focusing on the EU Taxonomy Climate Delegated Act as a first step. The taxonomy compass is then searchable by activity and related criteria across all taxonomy economic sectors.

HSBC Saudi Arabia announced offering the first environmental initiative investment fund in the Kingdom, known as the HSBC global equity climate change fund. Others are sure to follow.

Dr. Mohamed Ramady

Not to be outdone, the European Banking Authority issued a report on ESG risk management and supervision for credit institutions and investment firms, providing guidelines on the definition, management, and governance of ESG factors and the integration of ESG risks into the regulatory and supervisory framework for regulated institutions.

Other countries have followed suit with the top 1,000 Indian firms by market capitalization now required to follow new ESG reporting requirements when making their sustainability disclosures as required by the Securities and Exchange Board of India, while Singapore’s Green Finance Industry Taskforce led by the Monetary Authority of Singapore issued regulations on scaling green finance in the real estate, infrastructure, fund management, and transition sectors.

Of particular reference, and possible application by Gulf central banks, was the Singapore Monetary Authority’s framework to help banks assess eligible green trade finance transactions, as well as a detailed implementation guide for climate-related disclosures by financial institutions.

In November, the British government announced plans to develop a UK green classification system for sustainable activities, and this year it launched an independent green technical advisory group to advise on the standards for defining green investments, which will oversee the delivery of a green taxonomy — a classification system defining the criteria investments need to meet before they can be labeled environmentally sustainable. In June, the US Congress voted by a narrow 215-214 votes to pass the Corporate Governance Improvement and Investor Protection Act, which contained 11 titles pertaining to different ESG, climate, and sustainability disclosure topics. It requires public companies to annually disclose certain ESG metrics and their connection to long-term business strategy.

The Central Bank of Japan introduced a policy initiative with a new lending facility focusing on climate change, which will be launched later this year. Even Brazil, which has recently been criticized for relaxing its environmental guardianship of the Amazon rainforest, saw the Central Bank of Brazil stepping up its ESG framework by putting together a list of ESG risks that banks would have to incorporate into their credit models.

Traditionally, most central banks focus on inflation as an important element in setting monetary policy, but in an interesting development, the European Central Bank has recently discussed central bank policy and sustainability, with a view to adjusting monetary policy in line with sustainability consideration and not only the traditional macroeconomic toolbox. While these regulatory steps are to be welcomed, it does not mean that everyone has suddenly become an enthusiastic convert to ESG principles, as exemplified by a shareholder revolt in May when a Dutch court ordered Shell to lower its emissions faster. The shareholders defied management to elect two new climate-conscious board members, and Chevron’s shareholders went against its management to back emission cuts, but it is clear that a momentum for ESG change is happening globally.

This will be put on full show at the next global climate change conference — COP26 — scheduled for November in Glasgow, when the phrase “net-zero emission strategy” will likely be on the lips of all politicians burnishing their ESG and climate change credentials.

In Saudi Arabia, some banks are taking the initiative. In August, HSBC Saudi Arabia announced offering the first environmental initiative investment fund in the Kingdom, known as the HSBC global equity climate change fund. Others are sure to follow.

• Dr. Mohamed Ramady is a former senior banker and professor of finance and economics at King Fahd University of Petroleum and Minerals, Dhahran.