ESG reporting from an investor perspective

Alongside investors’ priority to maximise returns and reduce risk, more and more we are seeing investors take a keen interest in the ESG performance of the funds and investee companies they invest in and the impact they have on the societies and communities they operate in. In fact, in today’s environment, the former is directly impacted by the latter. In order for investors to achieve their goal of ensuring that their investments sustain long-term value, the funds and (underlying) investee companies should also consider the long term, and thus, should consider ESG in their decision-making. In addition, for funds and investee companies which offer solutions to environmental or societal challenges (like climate change or access to good quality and affordable housing or products), the environmental or societal impact they create at the same time measures their potential for financial success. Increasingly, we are therefore seeing investors pushing fund (and asset) managers to embrace the principles of responsible, and to a certain extent, impact investing.

Together with the increased investor demand for a stronger focus on ESG (and sometimes impact) from their funds and investee companies, we are seeing much more pressure on those investors themselves to report on and/or to validate sustainability risks and external non-financial impacts of their investments. Whether this be through new requirements such as the SFDR (which also applies to insurers and pension funds offering certain products), or revisions to the major pieces of EU investor regulation, being Solvency II for insurers (including certain pension funds) and reinsurers, CRR for credit institutions, and the IORP framework for occupational pension funds. In line with the European preference for ‘double materiality’ some of these rules do not only take into account sustainability risks impacting the value of the investments, but also the wider environmental and societal impacts of investment choices made by investors. Considering sustainability risks and impact on sustainability factors is not limited to investor investment decision making but also has strong effects on investor risk management (e.g., in the context of climate stress testing for insurers and banks), internal governance (e.g., board responsibility for sustainability matters) and board remuneration (e.g., many big insurers have tied board remuneration to the achievement of sustainability targets in relation to investments which gives the sustainability agenda a strong push). Investors can be forgiven for feeling a little overwhelmed by the onerous task of meeting all requirements – and this is without even mentioning the various voluntary reporting regimes, both general and industry-specific.

Attempts are being made to consolidate voluntary reporting regimes for investors, both at the broader general level through the ISSB, or through industry-specific work. Streamlining these reporting obligations would allow for more comparable information and would be a step forward towards a less fragmented system. In the below sections, you will find details on the consideration of sustainability risks and factors within the three main EU investor regulations, as well as information on a selection of relevant general and sector-specific voluntary standards and investor initiatives. Each of them requires investors to embed ESG principles into their investment processes and collect sustainability data, thus impacting the relationship between investors, their asset managers and the funds and investee companies they invest in.