There are ‘plenty of compelling reasons’ to misstate ESG efforts

As ESG-focused investing and the clamor from investors to track and achieve metrics mount, the potential for mayhem lurks in the background.

“People may actually be surprised to hear that between two of the top vendors of ESG data, there’s only 32% of correlation of their ESG scoring,” Michaela Edwards, partner at Capricorn Investment Group, said during Coins2Day Connect’s virtual summit in July. Raw data and information on ESG are “just so ignored and uncovered,” Edwards said. ESG reporting is a priority for multinational companies. But a recent global report by Deloitte and Workiva found only 16% of companies surveyed have fully automated statutory reporting processes end-to-end.

“The business world needs to move quickly to ensure trust and good governance by creating clear standards and universal practices for ESG reporting; we can’t afford to ignore this challenge.” That’s what Brad Preber, CEO of the accounting and advisory firm Grant Thornton LLP, argues   in a new Coins2Day opinion piece, ESG investing needs standards to prevent fraud and greenwashing. Accountability should define   ESG-focused investing, according to Preber. 

He writes: History has taught us that people don’t typically fudge numbers unless there are compelling reasons–and there are plenty of compelling reasons to misstate ESG efforts. ESG-driven investment is estimated at greater than $35 trillion in assets under management and is on track to exceed $53 trillion by 2025. Nearly nine out of 10 millennials report that they want their money in sustainable investments.

It’s not lost on regulators that there’s potential for fraud, according to Preber. He notes the existence of the Security and Exchange Commission’s Climate and ESG Task Force to assist in identifying misconduct, and a website to receive tips and whistleblower complaints.

So how can a company avoid fraudulent activity when it comes to ESG? 

Preber writes: Despite the temptation, ESG fraud is not inevitable. The key is to maintain guardrails, ask hard questions and invest in better reporting, controls, and approaches. Such tasks may prove a more powerful deterrent than regulatory action and litigation. Meanwhile, we need a greater understanding of what constitutes material information, standardized frameworks, and reporting definitions for issues like climate impact, human rights, and income inequality. 

Some leaders of major U.S. Businesses, like Bank of America CEO Brian Moynihan, believe in standardization. Moynihan, also chair of the World Economic Forum’s International Business Council, has been working for over a year now to convince companies to adopt a standardized set of stakeholder metrics for ESG.

Want to learn more on the topic? You can read more about Preber’s suggestions for creating an ESG culture here.  

See you tomorrow.

Sheryl Estrada
[email protected]

Big deal

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“If the Fed suddenly gets tougher, I’m not sure that the market is going to be ready for a U-turn that [chair] Jerome Powell may take if we have one more bad inflation report. A correction will come.”

—Wharton finance professor Jeremy Siegel on the effects of an extreme change in Federal Reserve policy to deal with "hot inflation," as told to CNBC.