{"id":28334,"date":"2021-12-07T13:46:39","date_gmt":"2021-12-07T12:46:39","guid":{"rendered":"https:\/\/blog.frankfurt-school.de\/?p=28334"},"modified":"2022-11-28T15:25:24","modified_gmt":"2022-11-28T14:25:24","slug":"can-a-set-of-minimum-esg-reporting-standards-solve-the-esg-reporting-dilemma","status":"publish","type":"post","link":"https:\/\/blog.frankfurt-school.de\/de\/can-a-set-of-minimum-esg-reporting-standards-solve-the-esg-reporting-dilemma\/","title":{"rendered":"Can a set of minimum ESG reporting standards solve the ESG reporting dilemma?"},"content":{"rendered":"

ESG reporting by companies and investment management firms is gaining global popularity. However, the lack of reporting consistency and comparability is causing confusion.<\/p>\n

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.<\/p>\n

What are the implications of the lack of minimum ESG reporting standards?<\/strong><\/h2>\n
    \n
  1. It negatively affects investment decisions<\/a>. ESG metrics should ideally offer stakeholders a way to make informed decisions, but currently, ESG information is noisy and conflicting. This makes it difficult to monitor progress and evaluate ESG practices and risks across companies. For example, in their study of 50 publicly listed companies (Forbes 500), Kotsantonis and Serafeim(2019)<\/a>\u00a0 found that they were reporting their Employee Health and Safety data in 20 different ways. As a solution, Berg et al. (2019<\/a>) suggest that investors obtain indicator-level data from raters and \u201cimpose their scope and weights\u201d. However, is this a realistic proposal?<\/li>\n
  2. Can we trust the data? The integrity and verifiability of ESG data, the numerous disclosure frameworks, and the subjective nature of the ESG ratings may spark doubt among stakeholders, which could limit integrating sustainability risks and opportunities into investment analyses. ESG reports in their current state consist of components that are only measures of input and processes and not actual outcomes (Kaplan and Ramanna (2021))<\/a>.<\/li>\n
  3. The lack of universal acceptability inherently means selective reporting, encouraging greenwashing. Greenwashing may occur because firms with poor performance often have a strong incentive to report on their ESG performance (Kruger et al. (2021))<\/a>. Without minimum standards, companies can cherry-pick data to spin their images without evidence to back their claims\u2014undermining investor confidence in the exercise. Going forward, an enforceable universal disclosure standard (with monitoring mechanisms and penalties) can curb greenwashing<\/a>.<\/li>\n<\/ol>\n

    How can we solve ESG reporting inconsistency and the lack of comparability?<\/strong><\/h2>\n

    Berg et al. (2019)<\/a> 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 \u201ctruly\u201d sustainable companies. Nonetheless, creating \u201cone-size-fits-all\u201d<\/a> reporting structures is difficult, and any global set of standards must account for regional differences\u2014due to varying requirements across jurisdictions as well in economic development, environmental challenges, or political structures (Kruger et al. (2021))<\/a>.<\/p>\n

    According to Zacharias Sautner<\/a>, professor of finance at Frankfurt School:<\/p>\n

    \u201cIt is imperative that mandatory, comparable, and audited ESG disclosure is introduced across countries.<\/em>\u201c<\/p><\/blockquote>\n

    Indeed, until we have a mandatory and uniform framework with a minimum set of standards, ESG will remain only a buzzword.<\/p>\n

    Is one framework or set of global ESG standards possible?<\/strong><\/h2>\n

    According to Kaplan and Ramanna(2021)<\/a>, ESG reports fail to address the unique measurement challenges within each ESG component due to their broad scope. The broad scope encourages companies to \u201cgloss-over moral tradeoffs\u201d when their actions improve one of the reported ESG metrics but worsen the performance of the unreported ones.<\/p>\n

    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\u00a0 COP26 in Glasgow to enable consistency, comparability, and alignment of incentives.<\/p>\n

    Given the popularity of the IFRS Standards on financial disclosure, Tim Mohin<\/a> (former head of GRI) believes it is well-positioned to achieve the goal of a global ESG standard.<\/p>\n

    But, what ESG dimensions should the universal standards incorporate? Given the \u201cS\u201d is complex and contextual, should the standards initially focus on those \u201cE\u201d and \u201cS\u201d dimensions where universal consensus already exists?<\/p>\n","protected":false},"excerpt":{"rendered":"

    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 […]<\/p>\n","protected":false},"author":1010,"featured_media":28336,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[37,33],"tags":[2205,2211],"class_list":["post-28334","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance","category-research-and-advisory","tag-esg-reporting","tag-non-financial-reporting"],"acf":[],"_links":{"self":[{"href":"https:\/\/blog.frankfurt-school.de\/de\/wp-json\/wp\/v2\/posts\/28334","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blog.frankfurt-school.de\/de\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.frankfurt-school.de\/de\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.frankfurt-school.de\/de\/wp-json\/wp\/v2\/users\/1010"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.frankfurt-school.de\/de\/wp-json\/wp\/v2\/comments?post=28334"}],"version-history":[{"count":10,"href":"https:\/\/blog.frankfurt-school.de\/de\/wp-json\/wp\/v2\/posts\/28334\/revisions"}],"predecessor-version":[{"id":28529,"href":"https:\/\/blog.frankfurt-school.de\/de\/wp-json\/wp\/v2\/posts\/28334\/revisions\/28529"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blog.frankfurt-school.de\/de\/wp-json\/wp\/v2\/media\/28336"}],"wp:attachment":[{"href":"https:\/\/blog.frankfurt-school.de\/de\/wp-json\/wp\/v2\/media?parent=28334"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.frankfurt-school.de\/de\/wp-json\/wp\/v2\/categories?post=28334"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.frankfurt-school.de\/de\/wp-json\/wp\/v2\/tags?post=28334"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}