ESG practices aren’t perfect – but investors can’t afford to wait


The COVID-19 pandemic has provided a unique moment for reflection. Governments around the world have articulated a vision to “build back better” and pursue a “green recovery”, while investors increasingly recognise the importance of non-financial sustainability issues to long-term value. Notably, the financial sector has coalesced around environmental, social and governance (ESG) factors to manage non-financial risks, identify opportunities and build resilience against low probability, high impact events – like pandemics, popular social movements, or the more unpredictable and severe weather events we can expect from climate change.

As such, practices and products to better incorporate material ESG considerations into financial decision-making have expanded to meet demand. Today numerous providers offer ESG ratings to assess material sustainability risk performance in companies, while metrics, disclosure frameworks, investment approaches and ESG-based financial products have similarly proliferated. ESG assessment has become a significant feature of global capital markets, with ESG-rated companies now making up 78% of total global market capitalisation1.

However, new empirical analysis from the OECD shows that, though there are vast quantities of ESG risk information in the market, it is not being captured or communicated in a way that meets the needs of market participants. Different ratings providers, for example, use and weight different metrics and often apply a level of subjective assessment, which means the same company might receive wildly different ESG scores. Disclosures at the corporate level are also highly variable, both in terms of information provided and metrics used, if any.  As a result, market participants often lack the consistent data, comparable metrics, and transparent methodologies to properly inform decision-making through a sustainability risk lens.

A recent OECD global survey of insurers and pension funds underlined the challenges this presents to institutional investors when it comes to portfolio management and asset allocation. Whether using external services or in-house analysis, investors flagged the difficulty in comparing the performance of companies and assets against ESG risk factors. This also made financial materiality of such factors unclear – which matters in the development of sustainable investment strategies, in meeting fiduciary duties, and explaining investment decisions influenced by ESG factors to beneficiaries.  

At the same time, market forces are pushing investors towards action on sustainability outcomes. We have seen large asset owners like BlackRock and the funds in the Net Zero Asset Managers Initiative pursue and promote robust, meaningful carbon transition strategies, in recognition that their large holdings expose them to long-term systemic risks like climate change, and that individual companies in their portfolios also face related specific physical and policy risks. Companies’ ability to deliver long-term value is also increasingly tied to its reputation and ability to meet the social license set by the communities in which they operate, which often encompasses ESG factors. On top of this, clients and beneficiaries are increasingly demanding investment strategies and products that not only deliver value, but align with their values.  

The good news is that the international community has recognised the market failure that prevents investors from accurately assessing ESG risks, pricing them, and allocating capital accordingly – and is mobilising to address this. International standard setting bodies like the OECD, the Financial Stability Board and International Organisation of Securities Commissions are progressing this agenda together, and the IFRS Foundation’s recent proposal to establish a Sustainability Standards Board is a promising platform to coordinate these efforts and drive a truly global standard on ESG risk metrics and reporting frameworks. This is exactly what institutional investors called for in the OECD survey.

Yet those efforts will take time, and the pressure on the investors to better incorporate ESG risk factors is here now. There are actions investors can already take, individually and as a community. As major clients of ESG ratings and other products, investors can demand greater transparency about what lies beneath those assessments. If using external ratings, investors should be aware of the risks such a fragmented market pose to delivering on ESG goals – for example the risk of “ratings shopping” by companies looking for the most flattering score. There are also best practices that can be incorporated into investment strategies and encouraged in the governance of assets, for example the OECD’s Guidelines for Multinational Enterprises on Responsible Business Conduct, which is complemented with specific due diligence guidance for institutional investors.

Finally, investors can and should be active participants as the global community converges around common frameworks to capture and report material ESG factors in the years ahead. This efforts will not be successful without close engagement and collaboration with industry, and the OECD looks forward to working with all players in the financial sector to ensure the market has the ESG information it needs to truly deliver on the promise of sustainable investing.

Greg Medcraft
Director for Financial &  Enterprise Affairs
Organisation for Economic Cooperation & Development (OECD)


1 Boffo, R., and R. Patalano (2020), “ESG Investing: Practices, Progress and Challenges”, OECD Paris,

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