ESG Definitions and Standards Currently ‘A Little Bit of the Wild Wild West’

WASHINGTON — Environmental, Social, and Corporate Governance are three central factors that shareholders are increasingly using to measure the sustainability and societal impact of their investments in companies or businesses. But there continues to be a range of opinions on how to define ESG and how to address and disclose ESG concerns.   

The Biden Administration has shown support for ESG investing and is pushing for increased government action on ESG, including suggesting mandating disclosures through the Securities and Exchange Commission. But without a thorough definition for ESG, and different standards for reporting, some believe ESG is a social agenda being advanced that deprioritizes the economic interests of the company and shareholders.

“Increasingly, the information our customers and markets want to see is about ESG,” said S&P Global CEO Doug Peterson, who also serves on the non-profit Bipartisan Policy Center’s new ESG Task Force to anchor an American effort toward taking ESG from ambition to action. He said shareholders use this information for making investments causing it to become a “major discussion item” in the last three or four years.

But with around thirty different rating companies, almost as many providing data and analytics, and many others providing their own standards concepts for financial reporting, there is an “alphabet soup” of ESG-related agencies, according to Peterson, which is fragmenting initiatives. 

“I see a lot of proxies that have climate disclosures and diversity questions from stakeholders. Shareholders are very… interested in this, and we’re going to have to respond,” Peterson said. “[But we have to start] coming together to move in the same direction… and it’s really important that there is a public-private partnership here.”

Glen Yelton, head of ESG Client Strategies, North America, at Invesco agrees that the integration of ESG is the intrinsic link between corporate shareholders and the broader stakeholder — society at large. But he also recognizes that there is some urgency to define what is an ESG product for the United States. 

“We’re going to see some pushback on stringent definitions, but we have seen some definitions out of Europe…” he said. “I don’t think the U.S. will adopt European [definitions] wholesale. There may be some conformity and standardization, but they don’t have to be identical.”

ESG definitions are important because characterizing a sustainable, responsible, or ethical investment can be nebulous. Standards are imperative so businesses don’t have to report differently depending on what jurisdiction they are in, as well as for regulations, like carbon offsets and taxes, or other requirements related to diversity and sustainability metrics.  

“Right now it’s a little bit of the wild wild west,” said Peggy Foran, chief governance officer and senior vice president at Prudential. “The SEC is looking at enforcement because there are no definitions and that’s a real problem.” 

Still, she said different businesses have different needs and different investors and raters have their own wishlists of what they want, so in addition to needing common definitions and a common framework, “it comes down to disclosure because it isn’t the same for every shareholder.” 

The argument for standardizing disclosure is about transparency. Debate remains over the precise contents and details of what ESG disclosures might or should encompass, as well as whether disclosures should be voluntary or mandated. 

While there are a few agencies developing accountability standards, BPC ESG Task Force members pointed toward the Sustainability Accounting Standards Board as the disclosure framework leading the pack.

“[SASB] has been vetted across industries… and evolved within multiple iterations. SASB is the one the SEC should look at first,” said Yelton. 

In late 2018, SASB developed 77 industry standards designed to evolve along with investors’ needs and connect these measures to performance. According to the board itself, its goal is to have 75% of S&P Global 1200 companies using the standards within five years.

“This is not a new trend… We’ve seen five decades of interest in these types of data,” said Yelton about long-term financial interest and societal obligations of ESG. “A reasonable investor should be aware that some of these factors can impact the value of the corporation… and a disclosure that provides equal information is critical; it provides guidance and direction and an equal playing field for all investors. It’s not something you believe in or don’t believe in, it’s data.”

But for data to be useful, it must be measurable, consistent, and available. This is why BPC’s ESG Task Force will be working to develop recommendations for ESG definitions, standards, and disclosures.

Many believe the growing interest in ESG shows that the purpose of organizations around the world has changed toward thinking more holistically about employees, customers, supply chains, and communities, rather than simply bottom-line financials. Others believe it is simply a climate overlay added to ongoing corporate and investment advisor disclosures. But either way, ESG is a rising trend. 

“The catalyst to the growth of ESG is corporations and the movement for broader corporate purpose,” said Peterson. “It’s a virtuous cycle to be thinking about the role of the company in a broader way.”