Insights

Why ESG reporting has made no difference

Despite a flurry of ESG reports and indices, little progress has been made on climate change

Well, here’s an interesting conundrum.

For the past 20 years, we’ve been told that if companies simply committed to measure and report publicly on their sustainability performance there would be at least four benefits.

  • Their individual ESG performances would improve (after all, what gets measured gets managed)
  • A link would emerge tying companies with better sustainability records to better equity returns.
  •  Investors and consumers would reward those companies with stronger sustainability records.
  • And ways to measure social and environmental impact would become both more accurate and more acceptable.

But while the number of companies filing corporate social responsibility reports that follow Global Reporting Initiative Standards, has mushroomed over the past decade, while socially responsible investment is now worth more than $30 trillion – nothing much has changed.

Carbon emissions have continued to rise and environmental damage has accelerated.

In fact, Kenneth Pucker, the former chief operating officer at Timberland who is now a lecturer at Boston University, writing in the Harvard Business Review concludes that ‘reporting is not a proxy for progress’. He argues that measurement is often ‘non-standard, incomplete, imprecise and misleading’ and could be an obstacle.

Pucker, who describes himself as ‘an enthusiastic member of Sustainability Inc’, says that Timberland’s approach was built on three pillars: respect for human rights, environmental stewardship, and community service. It was even one of the first publicly traded companies to use renewable energy to power factories, and released its first sustainability report way back in 2001.

But Timberland ‘learned that it’s extremely difficult to change the rules of competition in an industry – doing that requires much more than individual action’. And, despite all the reporting, there is no proof – although correlations have been established – that strong ESG performance causes better returns. Both could be down to good management.

One of the issues is that, as companies become more successful, their environmental footprint grows. It is also incredibly difficult to calculate some emissions. Timberland used to print Green Index scores on its shoe boxes that told customers about the environmental and social impact of each product, but it ultimately stopped doing so because of the challenges in calculating these.

Pucker lists myriad problems with sustainability reporting, ranging from a lack of consistency and auditing, opaque supply chains which makes traceability problematic to confusing information. He highlights the issue of carbon measurement, where companies need to measure three types of emissions.

The easiest is Scope 1 emissions which derive from facilities and vehicles (in other words, under a company’s control). Scope 2 emissions get into the murky world of electricity, including downstream and upstream emissions and suppliers’ outputs. But, by far the most important, Scope 3 relates to products’ usage after sale. It is the bulk of a company’s greenhouse impact – in 2009, Timberland reckoned it accounted for 95 per cent of its carbon emissions – but most don’t even attempt to calculate it.

The issue is even more important as more companies jump onto the ESG investment bandwagon, of which Pucker is similarly critical. For a start, what qualifies as sustainable? Indeed, research has proved that many funds marketed as sustainable are little different from traditional funds. Similarly, each ESG rating firm beats to its own drum and, as they rely on information that is, for the most part, unaudited and incomplete, can draw radically different conclusions. And while companies can pick and choose the metrics they wish to follow, it means that it is difficult to make comparisons on the basis of ESG performance.

Pucker concludes that the focus on measurement and reporting has likely helped to delay much-needed structural transformations. Real change will involve cost and changes in behaviour. He sees corporate commitments to science-based goals as promising while grassroots global movements for action may also force action. But ultimately the market cannot solve the social and environmental challenges: it is up to public policy to make tough – and unpopular – calls.