Let’s put some real G into ESG

Email: mark@transparently.ai

Anyone with a child that has advanced beyond Peppa Pig will be aware that the younger generation treats those of us from earlier cohorts with a jaundiced eye when it comes to modern tastes in morality.

In an unexpected twist, children have assumed the role served by the dowager aunt in earlier times. Naturally, the orientation of the battlements has shifted. Children have no desire to save anyone from inappropriate dalliances. Their desire, when not on Instagram, is to save the planet and everything in it from the enemies of wokedom.

Every year as younger generations assume greater control, the battle lines shift. The well garrisoned walls of finance were breached some time ago and the shift to sustainable investing is now, by far, the dominant industry trend.

Instagram aside, we view this trend as good news. Academic evidence suggests at least 10 percent of large companies commit securities fraud every year while 40 percent commit accounting violations¹. The jaundiced eye of youth appears well justified. Pressure for increased corporate transparency will persist and the focus on ESG investing will become more acute.

The next big step forward comes courtesy of the UK government, which recently introduced the Economic Crime and Corporate Transparency Bill.

When enacted, this bill will transform the UK regulatory environment. White collar crime will be easier to bring to court because prosecutors will only need demonstrate that an organisation lacked sufficient controls to prevent wrongdoing. Previously, prosecutors needed to establish that a “directing mind” orchestrated the offence – a tall order in a world with jam proof cross-cut paper shredders.

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Previously, prosecutors needed to establish that a “directing mind” orchestrated the offence – a tall order in a world with jam proof cross-cut paper shredders.

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Legal and accounting firms that take inadequate measures to prevent fraud, false accounting and money laundering will also be subject to prosecution. Accountants, in the UK at least, are about to become accountable and lawyers will be liable for the actions of those they advise. The impact on the behaviour of these agents will be profound.

Like a dreadnought slowly emerging from Belfast Harbour, the transparency bill is progressing through parliament, skirting the dreaded reef of amendments thanks to strong cross-party support in both houses. In view of the overwhelming political support for greater corporate sustainability, we expect all developed economies will sequentially follow with similar legislation. The need for accurate assessment of accounting regularity will grow.

Incredibly, none of the scoring metrics for governance offered by the ratings agencies and financial data suppliers include a serious attempt to measure accounting manipulation. This is akin to selling a submarine without sonar. If a company manipulates its financial accounts, how can we trust it reporting on environmental and social targets? Without the assurance of accounting regularity there can be no commitment to ESG investment.

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Incredibly, none of the scoring metrics for governance offered by the ratings agencies and financial data suppliers include a serious attempt to measure accounting manipulation. This is akin to selling a submarine without sonar.

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When ESG investing moves beyond a superficial box ticking, transparently.AI will be there to take sustainable investing to the next level. That’s our mission.