ESG metrics are growing in popularity but are still far away from being standardized.
Environmental, social, and governance (ESG) investing standards are not consistent or well-defined, let alone uniformly applied. In other words, they are not fully standardized.
This is the main takeaway from a new report by Scope Group, a Berlin-based credit rating firm: Out of 1,820 large-cap companies in 23 countries, Scope found, only a few achieved complete ESG disclosure, and disclosure often appeared opaque, limited or uneven.
For the environment, companies disclosed, on average, information on just 21% of the 145 indicators assessed in the survey. For social data, the disclosure average was 28% of 67 indicators. For governance, reporting was more extensive, reaching 70% of 202 indicators, but with wide variation in the level of detail: more so in categories like board composition and shareholder rights, extremely poor in energy consumption and greenhouse gas emissions.
“The limited transparency in ESG reporting that we find among such large, high-profile companies is a reminder of the challenges investors face in assessing corporate sustainability in the absence of internationally agreed, standardized data and reporting standards” says Diane Menville, head of ESG at Scope.”
Companies headquartered in Canada, Thailand and South Korea and in several European countries performed better than others on reporting transparency. In the EU, in particular, the importance of coordinating disclosure standards with existing and emerging global initiatives was recently recognized by a report of the European Financial Reporting Advisory Group.
Along with efforts by governments and regulatory institutions, a more powerful push toward more sustainable business processes could come from consumers and shareholders, Menville argues.
“Levels of voluntary ESG reporting can also be relatively high in efficient markets where there is investor demand for increasingly transparent corporate disclosure,” she says, highlighting the example BlackRock, which has urged companies to commit to net zero greenhouse-gas emissions by 2050. Those that will fail to do so will risk the removal from the firm’s actively managed funds, CEO Larry Fink warned.