EY’s sustainability chief said the ‘environmental, social and governance’ (ESG) label had been “hijacked” by marketeers today as the firm called for greater scrutiny and regulation of the space to prevent it falling into “disrepute”.
The ESG industry, which swelled to manage nearly $4tn in assets globally last year, has faced a reckoning in recent months as concerns grow that firms are exploiting the label to attract funds and ‘greenwash’ their operations.
In a new report released today, EY said the industry now faced a “make or break” moment as it grappled with a lack of standardisation, regulation and common purpose.
“Over the last five or so years, financial marketeers used ‘ESG’ to express ‘impact’, I think that’s where it’s run into trouble,” Steve Varley, EY’s global vice chair of sustainability, told City A.M.
“So ESG has been hijacked by several stakeholders and it’s been stretched from a basis for risk management into something to do with doing ‘well’.”
Varley said the label had wrongly become synonymous with “impact investing” and regulators now needed to standardise and define the space.
“I think there is a danger that ESG funds can fall into disrepute, because there are not enough standard definitions,” he added.
In its new report today, EY said five core areas must be addressed for the label to retain credibility, including increased transparency over ESG ratings, better understanding of the varying uses of sustainability information and lower barriers to entry for those from emerging economies.
The debate over ESG investing has been fuelled further by the war in Ukraine this year, after at least $8.3bn in funds labelled as ESG were found to be tied up in Russian assets just prior to the war in Ukraine, according to Bloomberg.