ESG reporting by companies and investment management firms is gaining global popularity. However, the lack of reporting consistency and comparability is causing confusion.
Nowadays, companies are free to choose which Environmental, Social, and Corporate Governance (ESG) issues to report on and how much detail to provide on the selected issues. In addition, they are also free to select reporting standards and frameworks out of a plethora of ESG reporting frameworks and standards. As a result, sustainability reports of firms even within the same industry can be burdensome to compare.
Berg et al. (2019) propose collaborating with rating agencies to establish transparent disclosure standards. Currently, companies use various reporting frameworks, with the most popular ones being CDP (formerly Carbon Disclosure Project), Global Reporting Initiative (GRI), Task Force on Climate-related Financial Disclosures (TCFD), and Sustainability Accounting Standards Board (SASB). However, working towards a universal framework and set of standards is necessary to consolidate existing ones to improve consistency and comparability. This would enable stakeholders to identify “truly” sustainable companies. Nonetheless, creating “one-size-fits-all” reporting structures is difficult, and any global set of standards must account for regional differences—due to varying requirements across jurisdictions as well in economic development, environmental challenges, or political structures (Kruger et al. (2021)).
According to Zacharias Sautner, professor of finance at Frankfurt School:
“It is imperative that mandatory, comparable, and audited ESG disclosure is introduced across countries.“
Indeed, until we have a mandatory and uniform framework with a minimum set of standards, ESG will remain only a buzzword.
According to Kaplan and Ramanna(2021), ESG reports fail to address the unique measurement challenges within each ESG component due to their broad scope. The broad scope encourages companies to “gloss-over moral tradeoffs” when their actions improve one of the reported ESG metrics but worsen the performance of the unreported ones.
Currently, there are no uniform standards for measuring and reporting corporate environmental goals, e.g., climate risk. But, there are efforts to harmonise the common ESG frameworks and standards. The International Financial Reporting Standards (IFRS) announced the formation of the International Sustainability Standards Board (ISSB) at COP26 in Glasgow to enable consistency, comparability, and alignment of incentives.
Given the popularity of the IFRS Standards on financial disclosure, Tim Mohin (former head of GRI) believes it is well-positioned to achieve the goal of a global ESG standard.
But, what ESG dimensions should the universal standards incorporate? Given the “S” is complex and contextual, should the standards initially focus on those “E” and “S” dimensions where universal consensus already exists?