The UK’s All-Party Parliamentary Group on Environmental, Social, and Governance (APPG ESG) has called on the government to launch an ESG strategy to aggregate existing frameworks, standards and disclosures.
APPGs are informal groups of UK members of parliament and peers focused on cross-party work on a specific sector or issue.
On Tuesday, APPG ESG published a report called Defining ESG. The paper, which calls for a holistic approach to sustainability, was broadly welcomed by the investor community.
However, the group’s definition of ESG as “non-financial criteria used by different stakeholders to judge a given asset’s profile, such as risk, impact or onward trajectory” attracted criticism from several UK market players.
A spokesperson for USS told Responsible Investor: “We disagree with the characterisation of ESG as ‘non-financial criteria’ – if ESG issues are material, they can also be financial. Our primary duty is to invest in the best financial interests of our members and beneficiaries. ESG criteria form part of the financial factors that drive this approach.”
The use of the term non-financial is a common complaint among sustainable finance professionals – as shown, for example, in an RI reader survey published almost three years ago.
Eliette Riera, head of UK policy at the Principles for Responsible Investment, said: “The report should set out more concretely that ESG has the potential to extend far beyond a risk management tool. The market needs to coalesce behind a more robust understanding of ESG as a tool which can facilitate better financially focused decisions to achieve long-term returns for clients.”
Fergus Moffatt, head of UK Policy at ShareAction, said that since ESG products and services are now mainstream, providing a framework that can equip parliamentarians and regulators to hold the industry to account is vital.
However, he added that he would have liked the group to broaden the definition of ESG to include other themes relating to responsible investment, including public health, labour rights and modern slavery.
Holistic ESG strategy
In the report, the APPG argued that the UK government’s policy agenda should include a dedicated ESG strategy. The recommendations were based on roundtable discussions held since the group’s formation in March 2021 and supplemented by insight provided by its advisory board.
Alexander Stafford, chairman of the group, said the UK “can and should go further” on ESG and called for a streamlined policy infrastructure for greater clarity.
A key ask for the APG is the linking together under one umbrella strategy of the UK’s sustainability initiatives, including the green finance strategy, the net-zero review, the strategy and growth plan, the Sustainability Disclosure Requirements, the green taxonomy and the Financial Conduct Authority’s (FCA) sustainable investment labels.
Tessa Younger, stewardship lead at CCLA Investment Management, said that while definitional problems for ESG are recognised from the outset, the report appears to conflate ESG with net-zero strategies and sustainability standards.
“There is a danger that existing strategies won’t be implemented,” she said. “For example, last July, the High Court found that the net-zero strategy doesn’t meet the government’s obligations under the Climate Change Act to produce detailed climate policies showing how the UK’s legally binding carbon budgets will actually be met.”
The report also warned that the UK is falling behind the EU on ESG disclosure, with the latter’s Corporate Sustainability Reporting Directive (CSRD) set to be introduced in 2024 and cover around 50,000 companies.
APPG ESG has requested an action plan for a “considerably wider” UK disclosure regime applying to more businesses, including SMEs.
Younger welcomed this: “The most useful recommendation in the report is for an ESG disclosures advisory group composed of businesses, business groups and investors to provide recommendations for a sub-strategy on how to support SME disclosures.”
But Chandra Gopinathan, senior investment manager for sustainable ownership at Railpen, said: “While the report is interesting in its attempts to define ESG and materiality, and establish the links between the various existing policies and strategies, it would have been good for it to go into the subject in more depth and particularly beyond disclosures, where the onus on corporates is growing already.”
He added: “We would recommend the use of the SASB materiality framework along with TCFD and the International Sustainability Standards Board (ISSB) to guide corporates, especially SMEs, when disclosing on sustainability issues.”
The USS spokesperson told RI that, while the pension fund agrees with the broader observation that there is a need for standardisation, it questions “the value of spending more time on this before seeking to make concrete progress”.
“We would expect data quality and consistency to improve over time, but we should not use the lack of good data as an excuse to delay action,” they added.
UK anti-ESG risk
APPG ESG also warned that the UK should anticipate political headwinds in the wake of anti-ESG backlash in certain US states, noting that ESG is increasingly mentioned in Parliament in a “negative sense”.
On this, Oscar Warwick-Thompson, head of policy and communications at UKSIF, said: “It will be important above all to minimise the risks of a misinformed debate around ESG, which we have seen in the US and elsewhere.
“In the coming months, we expect that UKSIF, other industry groups, and wider stakeholders will need to clearly set out a ‘modern-day’ interpretation of ESG and make the stronger case that active consideration of ESG risks and opportunities is not in direct pursuit of an overt political agenda, but necessary for investors to help fulfil their fiduciary duty.”