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Calpers Is Pushing For Standardized ESG Measurements At UN Climate Conference

Karsten Würth (➡️ @karsten.wuerth)

The push for standardized sustainability measurements could get a broad hearing in early November when world leaders meet in Scotland for the United Nations Climate Change Conference known as “COP26.” One hope is that governments will adopt more stringent requirements on how corporations measure and report their sustainability initiatives.

Photo Courtesy Mathias P.R. Reading

Among the strongest advocates of standardized measurements is the California Public Employees’ Retirement System, known as Calpers. It’s the nation’s largest public pension fund, with more than 2 million members and a total fund market value of about $485 billion.

The organization’s CEO, Marcie Frost, told Reuters in early October that she was hopeful leaders at COP26 will make strides toward helping investors decide which companies to buy or sell in the service of sustainability.

She and others worry that without some kind of standardized measurement of sustainability and Environmental, Social, and Governance (ESG) performance, the investment community must rely on the corporations themselves to present information in a clear and accurate manner. That’s not always easy.

“You ask three probing questions and it all rather dissolves,” Frost said.

The UN conference, scheduled for Oct. 31 through Nov. 12 in Glasgow, provides a big stage to address these concerns. More than 25,000 people from across the globe will attend the event, formally known as the 26th United Nations Climate Change Conference of the Parties. It is returning in 2021 after a one-year hiatus due to the COVID-19 pandemic.

Photo Courtesy Markus Spiske

The COP26 organizers clearly recognize the need for more consistent and transparent financial ESG reporting. The event’s website states that one of its goals for private finance is “improving the quantity, quality and comparability” of climate-related disclosures by implementing a common framework built on the Taskforce for Climate-related Financial Disclosures (TCFD) recommendations.

A COP26 paper titled “Building a Private Finance System for Net Zero” said current climate metrics, while valuable, “do not adequately measure climate transition.” Here are some of the reasons why: 

• ESG metrics lack consistency and transparency, with more than 1,000 approaches to calculating scores. 

• Green investment labels suffer from a lack of consistent standards, definitions, and metrics, which increases the risk of “greenwashing.”

• Carbon footprints and corresponding carbon dioxide per dollar-invested measurements only capture current emissions and fail to give credit for plans to reduce emissions. 

• Pure “green” investment is still “small scale,” with green bond issuance accounting for less than 4% of global bond issuance. It is also “inadequate to either fund a whole economy transition or meet increasing investor demand to align with the transition.”

Greenwashing is of particular concern to investors who seek more transparency and better data in corporate sustainability reports. 

“It has become increasingly difficult for investors to see through greenwashing when companies present themselves as more sustainable or environmentally friendly than they really are,” Phillip Braun, clinical professor of finance at Northwestern University’s Kellogg School of Management, wrote in an August column for Forbes.

He pointed to a recent survey by Quilter Investors, which found that greenwashing topped the list of concerns among 44% of investors surveyed. Another survey, conducted by Schroders Institutional Investor, found that six out of 10 investors believe greenwashing to be a challenge when choosing sustainable investments. One reason is that as ESG investing becomes more mainstream, there has been a sharp rise in the number of investment products labeled as sustainable.

According to Braun, Europe is “well ahead” of the United States in setting sustainable investing standards with the initial implementation of the EU’s Sustainable Finance Disclosure Regulation (SFDR). That regulation, which went into effect in March 2021, sets rules for sustainability-related information that the EU financial industry must disclose.

For investors in the U.S., it could be another year or more before the Securities and Exchange Commission delivers official standards for how companies report audited information, Frost said. 

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