In 2021, Environmental, Social and Governance (ESG) considerations are emerging as a mainstream theme for the capital markets. Associated with sustainability, the ESG concept integrates environmental and social concerns with a firm’s corporate purpose & strategy. Originating in the buyside, ESG is also a major consideration for sellside organisations. While ESG regulations and standards are evolving rapidly, as yet, there is no single globally adopted framework to enable comparability. Today, firms are facing an increasing demand for sustainability disclosure and an industry-level change is imminent.
By GreySpark’s Ivan Varbanov, Senior Consultant, and Rachel Lindstrom, Senior Manager


As the world’s top athletes lined up to collect their well-deserved gold, silver and bronze accolades at the Tokyo Olympics this summer, one fact that may have surprised viewers is that all medals awarded were made of recycled electronics. This year’s tournament took inspiration from the games in Vancouver in 2010, where all medals were made from alloys extracted from laptop and cell phone parts. Such environmentally-friendly initiatives have emerged in recent years and symbolize a theme which is garnering more and more traction – sustainability. In business, practices to manage the impact of firms on the environment and society are not new, with efforts predating even modern incarnations such as Corporate Social Responsibility (CSR), Socially Responsible Investing (SRI), Impact Investing and Ethical Investing. These and earlier initiatives paved the way for the emergence of ESG, a concept which attempts to combine sustainability concerns with endeavours to increase transparency and improve trust in financial institutions. The United Nations’ Sustainable Development Goals (SDGs) framework and the Paris Climate Change Agreement were announced in 2015 accompanied by a rejuvenated public interest in environmental and social issues, effectively turbo charging ESG on a global scale. Arguably, the COVID-19 pandemic has also had an accelerating effect on this trend as businesses have been forced to rethink the efficiency of their operations and exposures to risks associated with their supply chain, as well as the governance considerations related to their employees’ wellbeing such as work-from-home policies. In the primary markets, where financial products are crafted, investor pressure on the buyside is driving a dramatic rise in the variety and number of ESG-aligned products. Indeed, as a manifestation of the emerging Sustainability megatrend, GreySpark Partners believes that ESG has the potential to significantly change the DNA of how business is done worldwide as firms are actively assessing their ESG risks and opportunities, and sustainability considerations are taking centre stage in shaping the formulation of corporate strategy. Figure 1 illustrates some of the key themes in a word cloud format.
As the ESG concept crystalises, it has the potential to be an effective tool for the assessment of businesses’ sustainability claims. In this introductory article, part of a series on ESG themes in the capital markets, GreySpark explores ESG from a conceptual standpoint, reviewing a few of the most widely adopted sustainability standards and exploring ESG integration in the capital markets industry.
The Evolution of the ESG Concept
The term ‘ESG’ was first coined in 2004 by Ivo Knoepfel in ‘Who Cares Wins’, a report in which it is advocated for better incorporation of environmental, social and governance considerations in the financial services sector and, further, in 2006 with the launch of Principles of Responsible Investment (PRI), which proposed six principles for firms to follow to integrate ESG into their investment activities. Furthermore, in 2015, the United Nations set out the Sustainable Development Goals (SDGs) to be achieved by 2030, which present 17 targets that provide a wider framework and guide to prioritize ESG considerations. Despite this, in 2021, there is no clear and universally agreed upon definition. Broadly speaking, however, ESG considerations fall into three non-financial consideration categories, as described in Figure 2.
A recent study found that 91% of investors surveyed cited governance as having the greatest impact on their ESG investment decisions. Organisations with strong governance are believed to be more capable of implementing their ESG goals. In this respect, ESG is consonant with the FCA and PRA’s introduction of Individual Accountability Regime (Senior Managers & Certification Regime SM&CR), in 2017, and proposals on Operational Resilience, first set out in 2019, which focus on ensuring good governance and senior management accountability.
As public interest in sustainability surged and investors demanded more transparency, companies experienced pressure to disclose information on non-financial performance, and both voluntary and mandatory reporting increased, as shown in Figure 3. The demand for metrics against which a firm’s ESG credentials can be assessed is met by a raft of rating agencies and index providers which process data and rank companies based on a range of proprietary metrics. Granular ESG issues are categorised into a framework, an example is shown in Figure 4. Furthermore, indices are constructed based on the firm’s ESG scores. For instance, MSCI, a US index provider, offers over 1500 ESG & Climate indexes covering equities and fixed income broken into four themes / families. Moreover, ESG data providers, Bloomberg and Refinitiv offer ESG scores to more than 10 thousand companies each.
Figure 3: The Number of Voluntary and Mandatory Reporting Provisions and the Number of Countries Where Firms Utilize Them
(click image to enlarge)
Source: Carrot and Sticks
As awareness of the ESG concept increases so too does the number of instances of ‘greenwashing’ – the practice of “falsely attracting capital by claiming it will be used for sustainable projects”. In fact, in 2021, the European Commission released a review that found that about half of ESG claims lacked evidence. As such, greenwashing is one of the key drivers to adopt comparable disclosure standards.
Toward a Universal ESG Framework
As well as fighting false claims, ESG standards are needed to benchmark an enterprise against its peers and track its progress toward achieving its sustainability goals. Compared to financial reporting standards, sustainability frameworks are in their early days and a host of different ESG reporting standards exist. One key initiative is the Task Force for Climate-related Disclosures (TCFD) which has become a widely-adopted framework for disclosure. Furthermore, a number of independent standard-setting bodies threw their hats into the ring by creating non-financial reporting standards, some of which are industry-specific; key standards are described in Figure 5.
*GSSB is developing Sector Standards, currently in public comment period
**SASB and IIRC have merged to form the Value Reporting Foundation
The fragmented nature of the sustainability disclosure landscape creates a problem with comparability, and there are continuing efforts by several issuing bodies to consolidate existing standards. One such initiative is the Better Alignment Project. Launched in 2018, it is run by the Corporate Reporting Dialogue, which includes key standard-setting bodies, and aims to create scope alignment based on the recommendations from the TCFD. More recently, in June 2021, the New International Sustainability Standards, led by the International Financial Reporting Standards (IFRS), was launched to establish a global baseline of standards for sustainability-related disclosures for investors.
Some fragmentation can be expected in the implementation of the concept which can be linked to regional differences in the approach to ESG. Such differences can be attributed to two factors: existing regulatory frameworks across the globe and the specific objectives and priorities of governments. The challenge in the developed world, therefore, is to overlay ESG reporting standards onto the various existing frameworks and still achieve a reliable level-playing field for comparability. For instance, the EU is making progress with Sustainable Finance Disclosure Requirements (SFDR), which came into effect in March 2021 and introduces mandatory ESG disclosures for asset managers. Currently, under EU law, public-interest companies with more than 500 employees are required to make non-financial disclosures.
ESG Impact: A Game Changer
Buyside firms manage client-dictated investment mandates that increasingly demand ESG-aligned portfolios, and surveys are showing a growing number of investors are interested. ESG assets are projected to reach USD 53 trillion – approximately one third of total assets under management – and ETFs may climb to USD 1 trillion in organic growth by 2025. Further, ESG scores are used to inform a growing percentage of investment decisions as a high score may point to the firm as an outperformer. However, ESG investment strategies also vary considerably and do not necessarily exclude companies with poor ESG ratings. A portfolio manager may invest in an ESG underperforming firm to engage with management and steward the business in a more ESG-aligned direction. ESG financial products, such as green and social bonds are also on the rise and estimated to have raised USD 650 billion by the end of 2021. Many investment managers believe that they are already incorporating ESG principles in their investment selection process, despite the lack of a unified standard. BlackRock, the world largest fund manager, has advocated for firms to use SASB for sustainability reporting and TCFD for climate-related risks and related governance issues. Further enhancing its green credentials, in 2020, the firm announced its intention to divest from fossil fuels and focus on greener investment strategies. Sellside firms need to demonstrate how they integrate ESG considerations into their strategy and operations and, also, how they assess and manage the associated risks and opportunities. Successful implementation may necessitate a review of its corporate purpose and is likely to have an impact on how a bank does business in the long-term. A change as fundamental as this, calls for commitment and leadership at board-level, and most certainly involves the CFO and CEO offices. In 2021, banks are incorporating ESG principles into their long-term strategy, having assessed that future clients are likely to prioritise work with ESG-aligned organisations. NatWest, for instance, announced that by the end of 2021, the bank will stop lending or underwriting major oil and gas producers, unless they have a transition plan in line with the Paris Agreement.
For both buyside and sellside firms, successful implementation of ESG is heavily reliant on good data quality and management. However, studies indicate ESG reporting lacks sufficient quality, and as such data is emerging as a key challenge for firms in the capital markets.
The Road Ahead
ESG is the culmination of decades of thought on how business operations can align with environmental and social considerations. Baseline ESG definition and standards are likely to focus on meeting the needs of and providing transparency to investors and other key stakeholders. These needs are likely to differ from region to region and from industry to industry. In the capital markets, there is continuing demand for ESG products and for visibility of how well firms are meeting their ESG goals. A comparable global ESG standard is being developed and early adopters are investing to gain competitive advantage. It is, therefore, critical for buyside and sellside organisations to prepare for the imminent industry-level changes that are driven by the all-encompassing Sustainability megatrend. GreySpark Partners’ series of ESG articles will follow key themes and developments.
In the next article, GreySpark will explore one of the most widely adopted ESG initiatives – the Task Force for Climate-related Financial Disclosures (TCFD) and assess how it is shaping the ESG discussion in the capital markets.