Hugh Wheelan: OECD work on green finance and ESG could inform G20 sustainable finance roadmap

What is the best way to credibly mainstream/scale green/sustainable finance as quickly and environmentally sensibly as possible as part of meeting the huge and dangerous, scientifically agreed climate and biodiversity challenges (among others) that we face?

It’s a simple but enormous question that, sadly, we are only just beginning to ask ourselves ‘seriously’ (the questions have, of course, been out there for decades), and which I’m going to pull together a few thought pieces on over the coming weeks.

I’m the Master of Ceremonies at The 8th OECD Forum on Green Finance and Investment from October 11-14. It’s a virtual conference, free to attend and with a great roster of high-level speakers. Here’s my report from last year’s event.

As a first step to re-considering the opening question in this article, it’s worth looking at a couple of interesting new reports on the topic that are released by the OECD this week: the first, Financial Markets and Climate Transition: Opportunities, Challenges and Policy Implications and the second, ESG Investing and Climate Transition: Market Practices, Issues and Policy Considerations. 

The reports are launched today (October 4) at a side event of the OECD Ministerial Council Meeting.

Outside of what’s in the reports – and there’s no substitute for reading them – what’s important is that they will feed into a forthcoming (due in a month or so) set of recommendations/roadmap from the G20 Sustainable Finance Working Group.  

As RI reported recently, this G20 group is important because it is co-chaired by the Chinese central bank and the US Treasury, so if it produces a meaningful plan for sustainable ‘finance’,  COP26 in November has a chance of being meaningful to investors.

And it’s ESG, investors and the impact on green finance that we’ll focus on here.

Robert Patalano, Acting Head of Division at the OECD’s Financial Markets Division, and formerly of the Financial Stability Board, the European Central Bank and the US Fed, says a key point of the report was to question how far ESG could be a credible part of greening the financial system.

“We started by saying, Wait a second, is that what ESG was really built for? How does it work? What information does it, or doesn’t it, capture? And what are the outputs? The findings gave mixed results. ESG data captures a lot of things, but if you want it to bring climate policy and target alignment, well it’s not meant to do that. A high ESG score may mean many things, but not necessarily climate alignment – or even low carbon – or anything like that.”

Patalano says it’s not just about gaps in the data, it’s about how markets use the data: “Are financial actors actually able to price with the existing data? Are they rebalancing their portfolios? Are they using the right products to support the climate transition?”

OECD engagement with policymakers – notably at the Ministry of Finance and Central Bank level – and its work with market participants, make both papers worth checking; and there are good case studies of work in progress in different market jurisdictions.

Catriona Marshall, Policy Analyst at the OECD and another of the reports’ co-authors says international coordination for pragmatic policy on all of the points Patalano raises is key.

In terms of ESG data, she says differing methodology makes it difficult to get clear outputs. What is needed, the OECD thinks, is global transparency, comparability and quality of core ESG metrics with a clear reporting framework and definitions of ESG investment approaches.

Marshall says: “What’s concerning at the moment is that ESG metrics are being used by some companies and investors as a proxy for greening. What’s needed are forward-looking metrics based on climate transition showing where companies are today and the real extent of progress.”

Patalano adds: “Precisely. What’s needed are science-based targets, interim performance checks, and annual updating against those climate transition plans. Then we need asset managers to have really good engagement strategies.There are now some very large asset managers who are properly formalising these plans and telling boards to have a strategy and live up to it, otherwise the fund manager will openly commit to reducing exposure or beginning full divestment. There need to be consequences of not sticking to commitments.”