CEPS: A critical look at the ESG market
27 April 2022
Environmental, social and governance (ESG) investing has been practised in Europe for more than two decades, during which it has moved from niche to the mainstream market.
The rapid growth in the number of
sustainability-related financial products and service providers over the
past decade has also attracted regulators’ attention. The EU’s
regulatory capacity on sustainability represents a hidden treasure that
echoes the realisation that to achieve the EU’s environmental and social
goals, a sharp departure from the current predominant model of
capitalism and corporate governance is required. It has been argued that
an increasing amount of capital is misallocated due to the inadequacy
of ESG criteria and the ESG services market’s lack of transparency. The
rankings produced by ESG rating agencies create a false sense of
security, and investors who buy into ESG funds with dubious credibility
need protection. Considering the potential implications of ESG exposures
for long-term financial stability, it is in the public interest to
critically evaluate ESG criteria and reporting requirements to clear a
path for more meaningful and more operational corporate objectives that
contribute to the green, digital and just transition. Whilst in the
context of the EU sustainable finance package many regulatory measures
are already underway, it is imperative that the Commission fixes the
blind spots and completes the additional steps needed.
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