Taking the Plunge
Nicola Williams, Partner at Eversheds Sutherland, says the UK’s proposal to regulate ESG ratings could support transformative sustainability investments.
For over a century, swimming in the Seine was prohibited due to the health risks posed by the river’s water quality. This year, the ban was lifted following significant investment aimed at overhauling the sewerage system and constructing large rainwater retention basins. The Paris 2024 Olympics served as a milestone in this ambitious project, which aims to create a series of swimming pools in the Seine for Parisians’ future use.
Despite challenges, including issues highlighted during the Olympic triathlon trials, the project to clean up the Seine has made substantial progress. The French government and Paris metropolitan authorities have invested approximately €1.4 billion (US$1.5 billion).
Over the summer, the Swiss government has also highlighted potential ESG investment opportunities with its well-publicised financial reward offered for potential solutions to deal with a century’s worth of munitions that had been disposed of in Alpine lakes.
This approach has emphasised the importance of safe and environmentally friendly methods to clean up the lakes, with no mention of financial constraints.
It is estimated that the investment to achieve this could run into billions of Swiss francs.
There is certainly no shortage of significant projects and companies with ESG ambitions for investors to choose from. Against this backdrop, the UK government recently announced plans to regulate ESG ratings agencies.
We have to ask: will greater regulation, with more tangible, evidence-based approaches to ratings, increase the appeal to investors of ambitious projects like these?
ESG investment projects
Globally, there is no shortage of ESG investment projects. But not all of them will have the unique factor of the Olympics to give them exposure on the world stage.
Undoubtedly, this has driven interest and enthusiasm for the visionary Seine project, initially a dream of the Paris mayor and later championed by Jacques Chirac 16 years ago.
Similar in scale to these European projects are the significant proposed infrastructure developments in the UK, across transport, energy and water sectors.
The new Labour government has announced it will introduce legislation to regulate the rating of entity ESG performance. This is expected to come into force in 2025 and builds on a consultation undertaken by the previous administration.
This is a move that might be criticised as additional “red tape” that could discourage investment in ESG- and sustainability-focused schemes. In reality, however, this is exactly the transparency and strong governance that is needed to refocus ESG reporting. Doing this in the right way can encourage investment in significant, visionary projects which will have a long-term positive impact on the environment and communities.
Chancellor of Exchequer Rachel Reeves issued a statement flagging the proposals, which followed a consultation opened by the previous government on plans to regulate the ratings providers.
The move was welcomed by the UK Sustainable Investment and Finance Association (UKSIF) as helping to open the “black box” of rating methodologies which have sometimes yielded very different ratings for the same company.
The evolution of ESG reporting
Lack of transparency and inconsistent reporting may have held back the progress of ESG initiatives.
An over-dependence on desk-top reviews has meant companies were indirectly encouraged to focus on the communications aspects of packaging their activities for ESG recognition, rather than a grassroots focus on how an entity’s purpose can drive sustainable ESG-related growth.
That should change as a result of a number of factors which, taken together, mean that the focus of ESG has moved to a compliance – rather than a communications – issue.
Ratings providers had already been asked to comply with a voluntary code of conduct based on recommendations from the International Organization for Securites Commissions (IOSCO).
In the EU, a new regulation on ESG rating activities has been agreed that will also amend the Sustainable Finance Disclosure Regulation (SFDR) to ensure reliable and comparable information is presented.
Companies are adjusting to the requirements of the EU Corporate Sustainability Reporting Directive (CSRD) and the US Securities and Exchange Commission’s (SEC) climate disclosure rules. This move to greater regulation reflects a maturing of the reporting framework for ESG. The global picture for ESG reporting has become far more complex for multinationals to ensure compliance, but also more transparent and objective.
From a legal risk perspective, regulation of ESG ratings should bring about greater security, reduce the risk profile for investors and support reporting underpinned by sound assurance processes.
The future of ESG ratings
This regulation-based approach to ESG ratings and reporting is good news for visionary investment projects such as creating a swimmable Seine and cleaning up Lake Lucerne.
The framework for regulating the ratings providers, however, needs to extend to providing a framework for nuanced assessments of risks and impacts, such as considering climate risk exposure.
As ESG reporting enters a more mature phase, clear reporting frameworks and assurance processes, based on sound due diligence processes, will be crucial to building stakeholder confidence to support key projects and mitigating the risk of greenwashing claims.
All of these factors should make it easier for investors and companies involved in such flagship projects to demonstrate progress against the detail of regulation and the UN’s Sustainable Development Goals – making these projects more attractive.
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