Uncertainties Abound for Effective ESG Disclosures

We all know mandatory corporate disclosures are coming for performance on environmental, sustainability and governance metrics. The subject has become the dominant theme in corporate governance today in response to the push by activists, investors, and Democratic politicians to replace a hodgepodge of voluntary sustainability audits with formal reporting requirements. As the deadline to begin mandatory reporting nears, however, the marketplace still appears flummoxed over fundamental questions about tracking ESG data and rating the performance of companies.

A recent Financial Times piece from ESG specialists Craig Coben and Petra Dismorr critiquing ESG ratings systems summed up some of the mounting frustrations about reporting in general. “Investors and issuers alike complain that ESG ratings are expensive, subjective, inconsistent, flaky, and mostly unregulated, as well as rife with conflicts of interest,” they wrote. Importantly, Coben and Dismorr pointed out that different providers’ ratings systems are producing wide disparities in their evaluations of companies’ ESG performance. Although no one would argue that differences of opinion in such a project are inherently bad, a lack of consensus simultaneously makes the opaque set of ratings look capricious.

You could say the same about the process of companies collecting and analyzing their own data. This month, environmental consulting firm Watershed hailed its acquisition of emissions and accounting data firm VitalMetrics as a move that would enable its customers “to measure their emissions with new levels of global coverage and granularity, while meeting rising standards for verification and audit.” In its coverage of the deal, Axios noted Watershed’s investors include heavy hitters like Sequoia and Kleiner Perkins and it has already gained corporate clients such as Walmart and Airbnb.

That sounds impressive. At the same time, we’re left with little explanation as to what distinguishes Watershed and its newly acquired data platform from other players in what Axios describes as the “increasingly competitive space” of emissions accounting.

The reality is that we’re all flying blind when it comes to ESG reporting – companies, regulators, investors and the public at large. A third-party consultant’s impressive credentials help make for a compelling presentation to potential clients, but there’s little in the way of track record to identify effective approaches to reporting.

If companies are looking for a guiding principle to organize their ESG reporting, they might want to consider a point raised by Coben and Dismorr in their article. Conservative political rhetoric tends to frame ESG in terms of what investment analysis firm MSCI characterizes as corporate “goodness.” In other words, how well do companies live up to a caricature of liberal values? On the flip side, some corporate activists have an inherent suspicion of ESG programs and metrics as tools for corporate greenwashing.

In fact, ESG reporting and analysis are intended to paint a picture of how a company is managing its own financial risks related to ESG-centric issues. If companies keep that in mind for their ESG disclosures, it is probably their best bet to produce useful reporting for all stakeholders.