Executive summary

This edition of the OECD Business and Finance Outlook analyses current tools and practices with an emphasis on private finance and investment towards long-term value creation. It highlights the progress made to better incorporate ESG considerations in investment decisions, as well as challenges to effective implementation of ESG-based investment and finance strategies. It puts forward priorities and actions for market participants and policymakers to address such shortcomings, particularly around the urgent need for consistent, comparable, and verifiable ESG data.

Current market practices, from ratings to disclosures and individual metrics, present a fragmented and inconsistent view of ESG risks and performance. ESG ratings and investment approaches are constructive in concept, and potentially useful in driving the disclosure of valuable information on how companies are managed and operated in reference to long-term value creation. To this end, investors looking to manage ESG factors, particularly large diversified institutions, typically rely on external service providers of indices and ratings as a cost-effective means to guide the composition of ESG portfolios. However, the lack of standardised reporting practices and low transparency in ESG rating methodologies limit comparability and the integration of sustainability factors into the investment decision process. The link between ESG performance and financial materiality is also ill-defined, with little evidence of superior risk-adjusted returns of ESG investments over the past decade.

This fragmentation and incomparability may not serve investors in assessing performance against general ESG goals, or targeted objectives such as enhanced management of climate risks. The relationship between Environmental (“E”) scores and carbon emission exposures is highly variable within and between ratings. In some cases high “E” scores correlate positively with high carbon emissions, due to the multitude of diverse metrics on different environmental factors and the weighting of those factors. This illustrates the broad challenges in ESG investing, but also the specific difficulties facing investors looking to consider both financial and environmental materiality. It also underlines how current ESG tools cannot be relied on to manage various climate risks, or to green the financial system, at a time when these are rising priorities for investors and policymakers alike.

Fiduciaries such as asset managers and boards should be managing material ESG risks in a way that supports long-term value creation – but are not necessarily getting the data and information they need to do so. The OECD’s global survey of pension funds and insurers reveals the growing consideration of ESG risk factors in portfolios, the extent to which such institutional investors rely on external ESG data and service providers, and reiterates the challenges mentioned above in reference to investor experiences. These challenges extend to infrastructure financing, where the investment horizons of institutional investors and the nature of the assets increase exposure to longer-term sustainability risks. For corporations, managing and disclosing ESG performance and related risks is no different from their interest in managing and disclosing other material information as a key function of corporate governance.

Effective disclosures are important to the communication of forward-looking, financially material information, but practices remain at an early stage. Inconsistent disclosure requirements and fragmented ESG frameworks mean both institutional investors and corporates encounter difficulties when communicating ESG-related decisions, strategies and performance criteria to beneficiaries and shareholders respectively. This in turn makes it hard for beneficiaries to assess how their savings are used, and for companies to attract financing at a competitive cost that fully considers ESG factors. There is also an implicit ESG scoring bias in favour of larger companies and larger, advanced markets, which could affect the relative cost of capital and corporate reputation of companies outside of these groups, which is due in part to the high cost of ESG disclosure.

Banks are also looking to scale up ESG integration in lending transactions, but also face capacity, competition and data challenges. Given the scale and significance of lending and underwriting activities globally, stronger due diligence in reference to ESG risks would help align global capital with activities that avoid negative impacts on society and the environment, and enhance resilience in the financial sector, including to climate-related risks. To this end, banks would benefit from enhanced ESG risk management practices and sustainability reporting in their lending activities, and the development of metrics and methodologies to facilitate meaningful measurement of ESG risk.

Governments have levers available to drive better ESG outcomes as both enterprise owners and as investors. Around one-fourth of the largest global companies are entirely or largely state-owned enterprises (SOEs), and these companies can and should serve not only long-term value but also the fulfilment of widely held public policy priorities, including on sustainability measures. SOEs tend to have higher ESG scores than private companies, but this is not a given and depends in part on state ownership policy. A case study into the energy sector demonstrates how state ownership has sometimes been an obstacle to sustainability goals, such as the low-carbon transition, because of political concerns over the value of energy assets.

If left unaddressed, challenges in ESG investing could undermine investor confidence in ESG scores, indices, and portfolios. Developments and progress in ESG practices to date are promising, and they have the potential to be valuable, mainstream tools to manage risk, to align incentives and prices with long-term value, and to lessen the impact of future shocks like climate impacts or future pandemics. They can also be a valuable input into policymaking, by better articulating what the market can and should deliver in terms public outcomes, and what kind of further government intervention is needed to meet stated policy objectives. Taken together, the chapters of this Outlook conclude more needs to be done to fully harness this potential.

There are clear priority areas for policy action in facilitating fit-for-purpose data and disclosures in ESG investing. Greater attention and efforts are needed by regulators and authorities – including through guidance and regulatory requirements – to improve transparency, international consistency, alignment with materiality, and clarity in strategies as they relate to sustainable finance. This extends to the appropriate labelling of ESG products, with information that delineates the financial and social investing aspects of ESG investing.

At the same time, existing frameworks and policy instruments can drive better ESG outcomes and provide a solid foundation for reform. Closer adherence to, and wider implementation of, OECD standards, policy guidance and international best practices can already address some of the challenges described in this Outlook, especially around the assessment of risk and disclosure of material information. Key examples include the G20/OECD Principles of Corporate Governance, the OECD Guidelines on Corporate Governance of State Owned Enterprises, and the Guidelines for Multinational Enterprises and accompanying guidance, with specific guidance on Responsible Business Conduct for Institutional Investors and Due Diligence for Responsible Corporate Lending and Securities Underwriting.

Close engagement and cooperation between jurisdictions and with the financial industry is needed to strengthen the policy environment and drive better outcomes in ESG investing. Regulators of large jurisdictions with developed financial markets are already engaging on these very topics, and making good progress. However, capital markets are global in reach, as are many of the environmental, social and governance factors ESG practices seek to assess and manage. Therefore, global principles are needed to help establish good practices that acknowledge regional and national differences, while ensuring a constructive level of consistency, transparency, and trust.


This work is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of OECD member countries.

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