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Bailey McCann, Opalesque New York: Financial crimes advisory firm K2 Integrity Holdings Inc. has created and launched a new ESG certification. The certification is not another ESG score rating, but rather a due diligence-based certification designed to ensure that firms are actually following through on their ESG strategies.
K2 is led by co-Chief Executives Jeremy Kroll and Andrew Rabinowitz. Mr. Rabinowitz joined the firm in 2021 from hedge fund Marathon Asset Management, where he was President.
Mr. Rabinowitz says part of the reason why he joined K2 is to build out the certification, which he says will fill a gap in the existing ESG market. Investors can look at the ESG scores of individual companies or get a sense of what a given ESG fund does through its marketing materials, but marketing materials often tell the best story, not the whole story.
"What frustrated me a bit within the asset management community is that you hear of a firm that says they are 'very interested in diversity,' for example, and when you ask what they are doing to improve diversity they point to a few diverse candidates. Or you hear of a firm that is very focused on the environment, but it's not clear what they do," Mr. Rabinowitz tells Opalesque.
The certification uses both internal and external data sources to understand a given firm's ESG approach. The analysis will also look at how a strategy aligns to various regulatory frameworks including the Sustainable Finance Disclosure Regulation (SFDR) in the EU, and existing ESG guidelines in the US. K2 has partnered with a number of legal and academic ESG experts to work on its analysis. The firm has also partnered with RepRisk, an ESG data science firm for some of its external data.
RepRisk claims it uses a broad range of public, media, and reputable stakeholder sources to identify ESG risks.
Mr. Rabinowitz has brought on Marcel Herbst of Swiss firm Herbst AG to act as a Europe-based ESG advisor. Herbst notes that investors and asset managers in the EU have been focused on ESG issues for several years but it can still be difficult to compare firms and funds. "One of the big issues is that there are so many different frameworks and regulatory standards," Mr. Herbst says. "What we want to do is be able to show where the alignments are and break down the information so it is clear to investors as part of our certification."
Melanie Steiner, Managing Director for ESG at K2, envisions the certification as one that will evolve as ESG regulations and best practices do. "Our certification process is designed to be a living process so that we can absorb changes as they happen," she explains. "For example, the FTC is considering rule changes that could impact ESG strategies. So as we get the final rules, we're going to be taking that in and working with our partners to understand what the changes mean and adjusting our own certification process accordingly."
Other refinements may be on the horizon. The SEC has recently issued a new proposal that would require enhanced ESG reporting for investment firms. The proposal would require investment firms to include an ESG strategy overview so that investors could compare ESG reports. Additionally, the proposal sets minimum requirements for ESG reporting including how ESG factors are used in decision making.
Even without the new rules, firms may be interested in pursuing some form of certification. Earlier this week, the SEC's Division of Examinations noted that it would be taking a closer look at asset managers' ESG strategies as part of its examination priorities for 2023.
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