ZEUS: The chaos of ESG reporting

Investors say lack of credible, standard metrics impedes the growth of the ESG strategy

(David Callaway is founder and Editor-in-Chief of Callaway Climate Insights. He is the former president of the World Editors Forum, Editor-in-Chief of USA Today and MarketWatch, and CEO of TheStreet Inc.)

SAN FRANCISCO (Callaway Climate Insights) — Pity the weatherman.

As climate change thrusts more storms and floods on communities worldwide, the science of predicting weather becomes more critical. While data and monitoring have certainly improved, the old jokes about the incompetence of weather journalists just won’t go away. They are only as good as their systems, after all.

Investors in environmental, social and governance assets are learning first-hand this lesson. French fund manager BNP Paribas Asset Management this week released an investor survey about increasing interest in ESG criteria. It showed the Covid-19 era has pulled the social aspect of the strategy closer to the environmental and governance in importance as investors weigh corporate responses to the pandemic, such as how they handle their labor forces or diversity issues.

Alarmingly, though, it also showed 42% of investors believe the lack of established standard metrics are a “significant barrier to entry” to adding these factors to their investing strategies. Without streamlined disclosure requirements for companies, industries, even nations, it’s difficult to measure improvement.

The two largest standards bodies, the Global Reporting Initiative (GRI), based in Amsterdam, and the Sustainability Accounting Standards Board (SASB), based in San Francisco, agreed this week to form a partnership to ease the confusion between their competing sets of standards. While any progress is a good thing, the partnership does little beyond establishing a framework to explain why their standards are different. The SASB standards are regarded as more tuned to investors, but the GRI standards are more widely used around the world.

More than four-fifths of the S&P 500 Index (SPX) of largest U.S. companies disclose some form of ESG data, but those disclosures vary by industry, by the importance a board of directors puts on one bucket over another (social or environmental, for instance) and even by the size of the company. In his column this week in our newsletter, Mark Hulbert cites a study that finds that companies with the most employees are being left out of ESG performance data, skewing the results.

With metrics all over the place, it’s no wonder critics point to ESG as more of a fad then a reliable way to monitor performance and corporate accountability. What I’d like to see is a carbon footprint measurement for companies that updates daily, and can be charted. It would make the development of a true, global carbon market much easier.

Far as I can tell, that doesn’t exist yet. Please let me know if it does. In diversity data, we need to get past recognizing how many women or minorities are on boards or management teams and really recognizing how much better they perform the more diversified they are. On social, it’s clear from the past few years that stakeholder — rather than shareholder — enhancement is the clear goal management should be marked against.

Regulation and effective monitoring most always follows the money, and it will be the same with ESG metrics. The flood of money coming into the space from institutional investors, and to some extent by retail investors, will eventually force a metrics champion to emerge.

In the meantime, ESG investors will treat corporate disclosures just as they do their weather reports. Something that can change by the hour.

Until we have a universal metric for measuring a company’s commitment and ability to achieve social and environmental goals, investors who want to make money and identify strong ESG managements will simply be flailing in the wind.

Photo: Zooey/flickr.