The thinktank New Finance and economic development agency Luxembourg for Finance have been trying to determine how much of the talk around ESG is just talk, and how much is actually followed by measurable action. At the end of March 2023, the two outfits collaborated on aiming to measure the penetration of ESG in different sectors of the financial and banking sectors of the world.

From this study came a series of observations, starting with the fact that, while “ESG activity in all markets has virtually exploded and in 2022 [and] penetration remained relatively stable,” ESG is still mainly developed in the European Union compared to other global markets.

Other findings showed a demonstrable will to invest in ESG-compliant products--as nearly half of the world’s 2000 largest banking and finance firms have signed up to at least one ESG initiative, and activity--in sectors where it is measurable--is growing significantly.

There is a will and improvement

2021 was a breakthrough year was ESG labelled activity. “Despite 2022’s wider market downturn, penetration levels of ESG labelled issuance remained stable,” said the report. While green bonds remain the primary type of ESG labelled bond issuance, there also has been an increase in corporate social bonds, especially in the Asia-Pacific region.

As was echoed during the Luxembourg for Finance sustainability forum, the growth in ESG commitments among financial and banking firms need to be followed by measurable action--however, says the report, “firms are starting to do what they set out to do, but that there is still a lot of room for further progress.” The challenges remain in diverting funds in capital markets from so-called ‘bad’ activities--for instance, companies like oil refineries that adversely impact the environment--towards ‘good’ activities, like solar panel manufacturers. Here too, “things are getting better” as the funding ratio between both groups is beginning to change.

Data still missing

Lastly, the harvesting of data relating to ESG to measure its impact remains a challenge, said New Finance and Luxembourg for Finance. “While in some areas of banking and finance, such as investment funds or bond issuance, ESG finance is clearly labelled, in many others there is no clear distinction between ESG and non-ESG activity, and data is not comparable, does not exist, or is only limited to anecdotal examples.”

“The majority of capital markets activity remains non-ESG, and it is still difficult--if not impossible--to find clear data on ESG activity in a lot of important areas of banking and finance,” reads the statement, which continues: “The fact that many sectors are missing indicates that the overall level of ESG penetration is probably still overstated.”

More efforts must therefore be made to either implement action or to improve data recording methods.