What Is ESG reporting?
ESG reporting, which stands for Environment, Social, and Governance reporting, is a set of metrics used by businesses to attract investors through transparent data. Through analyzing factors such as carbon emissions, diversity, and corruption, ESG reporting helps shareholders make strategic and sustainable investment decisions. On April 5th, I attended a keynote address entitled “ESG: Global Breakthrough or BS?”, an event hosted by UT’s Center for Global Business. During the keystone address, two industry professionals considered the pros and cons of ESG metrics. Randall Kempner, a Senior Advisor at the Aspen Institute, exposed setbacks to ESG investing while his wife, Shannon Trilli Kempner, who serves as VP of Corporate Responsibility at Catalent Pharma Solutions, advocated for the benefits of ESG reporting.
What are the drawbacks of ESG reporting?
Randal Kempner calls ESG reporting a “marketing ploy” that many companies use to attract investors without meaningfully aligning values and financial decisions. Significantly, ESG reporting does not consider how companies confront environment, society, and governance issues. Instead, it determines how these three factors influence a company’s financial risks and play into corporate strategies. Seen from this perspective, ESG reporting operates as a financial tool for making strategic investments rather than an accountability metric for encouraging sustainable and equitable business decisions. As a result, a company’s ESG ratings could improve while their CO2 emissions increase. For Randal Kempner, the fate of environmental protection and ethical reporting rests in the hands of international organizations and informed consumers. Until consumers commit to sustainable purchasing, and the planet sets explicit standards on the cost of carbon emissions, ESG reporting will remain an illusionary marketing tool.
“Every year, companies invest more and more in sustainability initiatives. The tools, such as ESG data and reporting standards, can be useful since they help us to start measuring the side effects we need to manage better, and the people, who bring sustainability expertise, are also critically needed. But the overarching narrative that these alone will matter without rule changes risks rendering all of these efforts meaningless or even counterproductive. Having coaches who teach clean play doesn’t do much if cheating and dirty play still wins games. Should we wait for profits and purpose to magically overlap on their own, or does an outside and rather visible hand need to enforce new rules of the game to make it happen faster?”
-Tariq Fancy, who formerly served as Chief Investment Officer for Sustainable Investing at BlackRock, the world’s largest asset manager.
https://medium.com/@sosofancy/the-secret-diary-of-a-sustainable-investor-part-3-3c238cb0dcbf
What are the benefits of ESG reporting?
On the other side of the spectrum, Shannon Trilli Kempner argues that ESG reporting presents key metrics for measuring responsibility. Through collecting data on issues surrounding climate change, human rights, and good governance, the ESG framework offers a new language for enacting global change. Most notably, ESG reporting incorporates universally acknowledged metrics, encouraging businesses to align values and financial practices for the betterment of society and planet earth. Recent responses to Russia’s invasion of Ukraine demonstrate the potential of the ESG framework. Following the invasion, European leaders announced a plan to reduce reliance on Russian oil in favor of clean fuel, corporations such as BP and American Airlines ceased operations in Russia to boycott human rights violations, and governments of NATO countries imposed sanctions on Russia to shun them from the global economy. These steps indicate that the ESG framework possesses the potential to build a better world, creating an economy based on values rather than pure profitability.
The Bottom Line
Overall, ESG reporting presents a unique framework for pursuing social and environmental integrity, but on its own will not induce meaningful change. In order to reap the benefits of the ESG framework, it is essential for consumers, corporations, and governments to align their values and financial decisions, using their dollars to fortify human rights and confront climate change head on.
Sources
https://www.cfainstitute.org/en/research/esg-investing
https://medium.com/@sosofancy/the-secret-diary-of-a-sustainable-investor-part-3-3c238cb0dcbf
https://www.nytimes.com/interactive/2022/04/07/opinion/companies-ukraine-boycott.html