ESG Quick Takes 5: All the Problems with ESG Investing

For episode 5 of our ESG Quick Takes podcast, we explore ESG from a capital market perspective.

Guest description:

Mark Zurack teaches investing courses at Columbia Business School, and Cornell University, including ESG investing. Prior to this, Zurack worked at Goldman Sachs for 18 years where he started Goldman’s equity derivatives business and led its international expansion. His capital markets background gives him an interesting take on ESG, which we discuss in this podcast.




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NOT AN OFFER – The information on this podcast is provided for information purposes only and does not constitute, and should not be construed as, investment advice nor a recommendation to buy, sell or otherwise transact in any investment. RELIANCE – ESG Book makes no representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein, and accepts no liability for any loss, of whatever kind, howsoever arising, in relation thereto, and nothing contained herein should be relied upon. CONFIDENTIALITY – This podcast has been prepared on a confidential basis solely for the use and benefit of the recipient. No confidentiality nor privilege is waived nor lost by any error in transmission.  If you are not the intended recipient (or have received this communication in error), you must not read, copy, forward, nor print this communication nor any attachment, use them for any purpose, nor disclose their contents to any other person. VIEWS EXPRESSED – Any views or opinions presented are solely those of the guest speaker, and do not necessarily represent the views or opinions of ESG Book. ENQUIRIES – Any enquiries in respect of this podcast should be addressed to ESG Book or its affiliates.

Machine Learning Models Don’t Work

*Without Good Design.

Machine learning (ML) is a branch of artificial intelligence that uses data and algorithms to imitate human behaviour (Brown, 2021). It is used in a variety of financial applications such as fraud detection, automatic trading, robo-advisors, loan underwriting, and targeted advertising. Machine learning revolutionizes how we invest, trade, advertise, and do business more broadly.

Machine learning also transforms how we conduct research and generate business insights. It offers unprecedented opportunities to use big data to identify patterns and extend our understanding of mechanisms. For example, creditors increasingly use ESG information to assess default risks. Currently, this assessment is predominantly of qualitative nature meaning that the analyst screens available material and incorporates the resulting impression into their assessment. Research involving machine learning could allow us to systematize the interrelations and generate tangible and actionable insights, including quantitative prediction of credit default probability.

A key question that arises upon this new opportunity is how to integrate machine learning in research design. Is it an add-on? Or a replacement? Or does using machine learning in research require a completely new way of designing studies altogether? This article discusses different ways to integrate machine learning into research design and their implication for knowledge generation and product creation. We use ESG and credit default as an illustrative case study. Specifically, we demonstrate the applicability of an ML-driven research design approach to determine the inter-relationships between ESG factors and credit default probability.

To read the full article, click here.

Sustainable Finance Regulatory Update: June 2022

In this month’s regulatory roundup, the EU comes one step closer to finalizing mandatory corporate sustainability disclosure rules and setting quotas for women on corporate boards. The political implications of including certain activities in the EU green taxonomy become apparent,  as EU parliament members seek to rule out nuclear and gas from being classified as “green investment”. The Parliament has also changed its tone with respect to the carbon trading scheme seeking lighter reform. With the proliferation of ESG ratings companies, regulators across Europe are proposing regulation of the ratings market and assessing the implications of variance in ratings methodologies. The UK is accelerating its net-zero vision by accounting for climate risk in pension funds and adding material risk assessment to actuarial standards. At the heels of the SEC’s proposed climate-risk disclosure rules, the CFTC is seeking clarity on the impact of climate risk on derivatives and commodities markets. As we turn to Asia, China has issued ESG disclosure standards for the first time, for which it has released guidance. The journey to sustainable growth around the world is marked by modest reforms that underscore a permanent shakeup in ‘business as usual’.


Provisional Agreement for EU Sustainability Disclosure Rules

The Council and EU Parliament confirmed a provisional agreement on the Corporate Sustainability Reporting Directive (CSRD). The CSRD will tighten sustainability reporting rules which were first established under the Non-financial Reporting Directive (2014). By law, the EU requires all large companies, listed companies and SMEs to report on the impact of business activities on environment and human rights. Sufficient flexibility baked into the new rules provide for SMEs to be exempt from the application of the directive until 2028. Read more

EU agrees 40% gender quota for corporate boards

The EU has agreed that companies will face mandatory quotas to ensure women have at least 40% of seats on corporate boards. From 30 June 2026, large companies operating in the EU will have to ensure a share of 40% of the “underrepresented sex” – usually women – among non-executive directors. The EU has also set a 33% target for women in all senior roles, including non-executive directors and directors, such as chief executive and chief operating officer. Read more

EU Lawmakers Vote to Keep Nuclear and Gas out of Green Investment Taxonomy

In a statement announcing the committees’ vote on Tuesday, the MEPs while acknowledging the role of nuclear and gas in providing a stable energy supply through the transition to a sustainable economy, clarified that their inclusion in the Taxonomy “do not respect the criteria for environmentally sustainable economic activities.” Read more

EU compromises on green measures including CBAM

The European Parliament has agreed to a compromise package of green measures including some tightening of the EU’s high-profile carbon trading system and a new scheme to penalise import of commodities like cement from countries with lax emissions rules. The packaged includes a revised EU Emissions Trading System and Carbon Border Adjustment Mechanism. Read more

EUROSIF calls for a proportionate regulatory framework for ESG ratings providers

Eurosif released its response to the EU’s consultation on creating an appropriate framework for the regulation of ESG data providers. In the paper, Eurosif suggests that instead of attempting to achieve full comparability of ESG ratings, regulatory regimes should emphasize transparency in methodologies and conflicts of interest. Eurosif estimates that rating methodologies will eventually converge, as standard-setters such as EFRAG and ISSB articulate reporting frameworks for corporates. Read more

ESMA publishes findings from ESG Ratings Call for Evidence

The EU’s securities market regulator shared key findings from its study on ESG ratings providers. According to the study, the structure of the market indicates a high concentration of small EU entities and a few large non-EU providers. Typically, the users of ESG ratings are contracting for these products on an investor-pays basis from more than one provider simultaneously. The rationale for selecting several providers is to expand coverage of assets, geographic area and to have diversified ESG assessments. Read more

French regulator AMF calls for stricter regulation of ESG ratings providers

French stock market regulator, AMF, is also advocating for the regulation of European ESG ratings providers. ESG ratings are becoming widely accepted signals for investors and asset owners seeking to include or exclude companies based on reputation risk. The AMF has acknowledged the current level of variance between ratings methodologies. To solve this, it has suggested a thorough examination of all aspects of ESG ratings and services. The focus of any forthcoming regulation being transparency in company objectives and methodologies. Read more

United Kingdom

UK aligns pension fund metrics with net-zero strategy

The UK government has introduced an initiative that will allow pensioners to see the impact of their investments on climate change mitigation. Pension schemes will now be required to publish climate-risk reports measuring the alignment of investments with UK’s net-zero strategy. The concluded consultation seeks to boost green investments and support transition to a sustainable economy. Read more

UK Financial Reporting Council to require actuaries to include climate and ESG-related risks

In a published consultation, the Financial Reporting Council proposed changes to the technical actuarial standards (TAS 100) that would require practitioners to consider all material risks and factors while conducting actuarial duties. The existing technical standards are embedded in a “principles-based” approach and lend themselves to varied interpretations of non-traditional risk analysis. The FRC plans to release guidance to provide further clarity to practitioners on ESG methodologies and best practices.  Read more


CFTC releases RFI on climate-related financial risk

The United States Commodities and Futures Trading Commission released a request for information on how climate risk is related to derivatives and underlying commodities markets. THE RFI is intended to inform the CFTC’s next steps in establishing climate-related financial reporting requirements and support feedback on the 2021 Report on Climate-Related Financial Risk from the Financial Stability and Oversight Council. Read more


China issues first ESG disclosure standard

The China Enterprise Reform and Development Society (CERDS), Ping An Insurance Company of China and dozens of other companies in the country have developed its first environmental, social and governance (ESG) disclosure standards, which come into effect June 1, 2022. The Guidance for Enterprise ESG Disclosure, which was published by CERDS, is based on relevant Chinese laws, regulations and standards while considering China’s context. It includes a corporate disclosure indicator system with three dimensions – environmental, social and governance – and provides a basic framework for their disclosure. Read more

ACRA and SGX set up advisory committee to create roadmap for Singapore’s sustainability reporting

The Accounting and Corporate Regulatory Authority and Singapore’s Exchange Regulator announced a new Sustainability Reporting Advisory Committee to advise on a roadmap for Singapore’s sustainability reporting. The Committee will consider the applicability of international reporting standards in Singapore. SGX introduced mandatory sustainability reporting as of 2016 and will implement climate reporting from 2022. Read more

Other News & Resources

  • International Securities Lending Association calls for clarity on ESG collateral rules: Industry body suggests the market would benefit from regulatory certainty on the extent to which asset owners and managers should consider ESG risks when accepting collateral. The International Securities Lending Association has appealed to regulators for clearer guidance on the extent to which ESG policies should govern securities lending practices. Read more.
  • French President Emmanuel Macron and UN Secretary General’s Special Envoy for Climate Ambition and Solutions Michael R. Bloomberg Announce a Climate Data Steering Committee to advise how to Capture and Create Open, Centralized Climate Data to Accelerate the Transition Towards a Resilient, Net Zero Global Economy. Read more.
  • The Basel Committee on Banking Supervision has released a set of principles for the effective management and supervision of climate-related financial risks. The principles promote good management practices and provide a common baseline for internationally active banks and supervisors, while maintaining sufficient flexibility given the evolving regulatory landscape.
  • Eurosif Report: Eurosif released a report on EU sustainable Finance & SFDR: making the framework fit for purpose. The report provides an overview of challenges faced by market participants applying SFDR provisions and gives recommendations on tackling these challenges. Read more.
  • Free online course: Enhancing Confidence in ESG Information. WBCSD – World Business Council for Sustainable Development and AssuranceMark have teamed up to design a free online course to provide investors with a toolkit they can use to navigate the ESG landscape and demand better quality information. Register here.