Investors and companies are both increasingly interested in sustainability issues. These issues typically revolve around environmental and social factors that have real but potentially long-term or contingent impacts on corporate financial value. This, in turn, makes traditional accounting metrics less valuable in assessing sustainability issues than in analysis of many other business issues. Therefore, both investors and companies – as well as groups that service or monitor and regulate them – have a growing interest in receiving meaningful corporate environmental, social, and governance (ESG) information on an ongoing basis. Despite this shared interest, investors often complain about the difficulty of gathering and truly understanding corporate ESG data, while company representatives may express concerns about “survey fatigue,” or the amount of time and resources it takes to supply the requested data to various investors and ESG research firms.
This report explores and documents the extent to which corporate ESG information tracked and managed internally by companies is consistent with analogous information sought by external parties, and in particular, by ESG investors and the research companies that serve them. To conduct our analysis, we obtained corporate data from the results of a recent “Green Metrics that Matter” survey conducted by the National Association for Environmental Management (NAEM), and developed ESG researcher/investor data by collecting and compiling publicly available information from company web sites and other sources. We supplemented the empirical data provided to or developed by us with interviews with knowledgeable representatives of some of the companies represented in the corporate survey and of the ESG research/investment firms. We believe that the resulting database is the most thorough, representative, and sophisticated collection of information on the interface between corporate sustainability measurement efforts and investor-focused external evaluation assembled to date.
1. There is general agreement about the key corporate sustainability issues, but not necessarily on the specific form and number of metrics used to measure them. There is also a fundamental difference in the purpose(s) to be served by examining corporate ESG information between corporate executives and ESG researchers/investors.
- Increasingly, corporate managers and ESG researchers/investors believe that the same ESG issues are important, but may track them at very different levels of detail.
- Corporate ESG metrics and approaches to managing to them are based on business fundamentals (e.g., benefits/costs, importance to customers, possibility of impact).
- Disclosure of the ESG metrics of common interest is very uneven, with some being disclosed by a great many companies and others disclosed by very few.
- ESG researchers are concerned both with corporate accountability and with predicting the future, and their information requests and collection methods reflect the need to both receive appropriate assurances and to inform a judgment about the management quality of companies.
2. Both ESG researchers/investors and corporate EHS managers and executives approach ESG issues from a risk mitigation perspective, not a value creation perspective.
- Most specific indicators used by corporate EHS managers and executives and investors focus on identifying negative attributes or downside risk.
- While the members of both groups are interested in the potential for ESG-related financial value creation, their interactions are generally devoid of information speaking directly to this crucial issue.
3. Future improvements in corporate disclosure quality and in efficient and adroit collection and use of these data in investment analysis will require improved clarity and more effective and consistent communication between companies, researchers, and the consumers of information.
- Substantial, non-incremental progress depends on clear articulation, from both companies and ESG researchers/investors, of corporate financial value creation through advancements in managing ESG issues and their results.
- Typical ESG metrics reporting practices and guidelines have advanced, but also have had some unintended and unfortunate consequences, including too few companies reporting, and some researchers requesting a substantial number of additional (non-GRI) metrics. These adverse outcomes often reinforce one another. More widespread and consistent disclosure on fewer indicators might create more utility for both corporations and investors.
- Greater dialog and sharing of information and perspectives is essential for both sides to understand the other’s needs and constraints, and to forge communication mechanisms that are more effective and less burdensome than current practices.