Without harmonisation and common criteria, the ESG investment landscape will become a ‘Wild West’, argues techUK’s Craig Melson
ESG investing is increasingly becoming more important – and rightfully so. If money makes the world go round, then we want to see it flow towards companies that have purpose, want to govern themselves responsibly, and leave the planet and its inhabitants in a better place. ESG investment will never go away and is an inherently good component that will genuinely leave society, the economy and the planet better off.
However, like many other disruptive new factors, the pace and rapid scaling of ESG investing is presenting challenges that need to be addressed. In the last decade, we have gone from a couple of dozen rating agencies to over 600, all of which have their own individual metrics, weighting, and they vary wildly in previous sustainability expertise and maturity.
Some ESG ratings take into account just the economic performance at risk due to ESG factors, while others take too much into account to the detriment of the cleantech sector. This means it is extremely uncertain for businesses seeking investment, as they don’t know how they will be treated, and poor-quality ratings also risk dragging down market confidence in what is and isn’t ‘green’.
The other main problem that we are seeing is that too many well governed and environmentally strong tech firms are being denied investment due to low ESG scores caused by an unstandardised system. Firms in cyber-security, infrastructure, defence, and even clean-tech, are frequently falling foul of ESG rating agencies which are holding back the UK clean-tech sector and forcing them to go abroad.
Recently, a blockchain platform specifically designed to help grow carbon markets was denied investment by institutional investors because their ESG score was too low to be included in portfolios. Given the importance of carbon trading in the short term and the reliability of blockchain, this meant that a transformative and innovative solution will not be able to scale as intended. Moreover, a cyber-security business that focused on protecting renewable energy infrastructure was also denied investment because they were using the same technology used in the oil and gas sector, disregarding the uses that set it apart from its non-environmentally friendly counterpart.
The need for standardisation is clear and we hope the UK can drive this as it consults on the subject later in the year. Creating a standardised system via the International Sustainability Standards Board makes sense and we need a common methodology in partnership with the EU and beyond that can be adopted as widely as possible.
techUK and our members believe that investment in digital tools is the best way to reach net zero. As well as helping to decarbonise entire sectors, digital tech can cut energy costs, improve productivity, and create a whole swathe of new business opportunities. The urgent deployment of this technology is essential in addressing the climate crisis, so it is equally essential that ESG rating agencies are not inadvertently holding back clean-tech.
Craig Melson is associate director for climate, environment and sustainability at techUK.