Stakeholders at the government, institution and investor level are increasingly looking at ESG in a more granular way – seeking information on many other criteria considered fundamental to improving the planet, business practices and wider society. It’s becoming increasingly apparent that reporting is not keeping pace. In an industry that’s no stranger to numbers, what’s going wrong and what steps can be taken to resolve these issues?
The investment industry is of course no stranger to numbers. Performance and success in this realm have been solely dictated by numeric gains and losses, which are easy to quantify or report on, and that make it more straightforward for investors to make comparisons.
Where is ESG reporting going wrong?
This isn’t really the case for ESG factors. There’s a wealth of qualitative data but it is much more difficult to compare. But as ethics and impact become more and more prominent (hence the emergence of ESG), so too will the means to measure success.
Most stakeholders would agree that there’s a distinct lack of standardisation in measuring and reporting ESG implementation – both at a corporate level and at a retail level. The number of differing approaches makes it difficult for investors to make decisions that align with their objectives.
ESG rating agencies
The ESG ratings sector emerged as a result of the call for standardisation. Four major organisations (with varying scope and coverage) are widely used by investment managers.
Despite their qualities, these off-the-shelf solutions haven’t necessarily achieved the desired outcome and have suffered from two key limitations. First, they operate on different methodologies and standards, so their ratings aren’t directly comparable. Also, their final scores tend to lack correlation – where one provider ranks a company highly on an ESG indicator, another provider may rank them poorly on the same indicator.
