The Potential of the ESG industry
Despite its current shortcomings, ESG could in fact be an effective tool for advancing towards a more sustainable world. Though the ESG industry grew out of the need to provide investors with a more accurate measure to assess a company’s performance, shareholders are not the only party to be interested in evaluating corporate sustainability. Mandatory and standardised ESG reporting could decrease the information imbalance between companies and their stakeholders as well as introduce balanced disclosure of both positive and negative impacts – an issue which the current voluntary reporting frameworks have been unable to successfully address.
Most importantly however, the rising popularity of ESG investment creates a clear business case for sustainability. Despite the talk about switching to “stakeholder capitalism”, a cost-benefit analysis is inevitably still part of any company’s decision to address sustainability issues. While carbon emissions reductions can be tied to cost reductions then social sustainability actions, such as increasing board diversity, are much harder to quantify to financial benefits. Therefore, the pressure on ESG risk management can push companies to address sustainability in a more holistic manner and increase focus on social sustainability, which has so far been playing second fiddle to environmental issues.
Aside from the wider societal benefits, integration of ESG considerations into the company’s strategy is advantageous for a variety of reasons:
Moving towards standardisation
The ESG ratings, standards and frameworks industry is not yet mature, rendering ESG reporting rather challenging, however steps are being taken to increase standardisation and transparency. The EU is in the process of developing the Corporate Sustainability Reporting Directive (CSRD) in the aim of creating higher standards to ESG and sustainability reporting, the International Sustainability Standards Board (ISSB) was created last year in the hope of establishing a global baseline for sustainability reporting. The US Securities and Exchange Commission (SEC) has also recently unveiled their proposal for climate disclosures, with disclosures on corporate board diversity, human capital management and cybersecurity risk governance still in the works.
The field of ESG reporting is developing rapidly and the discussion on the advantages and disadvantages of upcoming developments will need to be left into another blog post. What is clear, however, is that setting higher standards for ESG reporting is of crucial importance as ESG investment continues to reach new heights with Bloomberg estimating ESG assets to exceed $50trn by 2025[i]. If the underlying assumptions of these 600+ ESG ratings, standards and frameworks are erroneous, then we are misallocating enormous amounts of resources and considering that the 2050 deadline for achieving net-zero is approaching with neck-breaking speed, we have little margin for error.
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