Is ESG reporting a bunch of marketing fluff?

Environmental, Societal and Governance (ESG) is fairly new term that first appeared in a report in 2005 for a conference mainly focused on institutional investors, asset managers and government bodies. The below extract from Wikipedia describes what ESG is:

‘An evaluation of a firm’s collective conscientiousness for social and environmental factors. It is typically a score that is compiled from data collected surrounding specific metrics related to intangible assets within the enterprise. It could be considered a form of corporate social credit score.’

Key terms I pull from the above statement are data, intangible and typically. Why these terms?

Data

Everything revolves around data and ESG reporting is no different. The key area here though is where is this data coming from and what do you need to report on for ESG? What is included and what’s not.

Intangible

Intangible means something not physical or something that cannot be touched. This raises questions to how do you measure something accurately that cannot me seen or touched. For example how do you measure happiness accurately? How do you measure someone’s social standing?

Typically

As this space is quite new and is not a mandated function by law there is no central governing body or standard of reporting. Synonymous with ESG is the term standards (plural) and governing bodies (many). If there are many ways to measure and report something then having any form of standardisation across businesses will be impossible.

Therefore we can see ESG reporting as requiring undefined data from abnormal sources on aspects of a business which are intangible which have no standard only multiple ‘governing bodies’ and their views and opinions of what ESG reporting is or how companies rank in their opinion.

To be clear I am a major supporter of ESG reporting and have helped numerous clients understand the complexities and hurdles to overcome with ESG reporting. However I think it is worthwhile to layout my views and experience in this space.

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Let’s start with an example of two companies who are ranked highly in numerous ESG reports as being outstanding examples, both are in the oil and gas industry and have been in business for decades, British Petroleum and Eni.

If you visit their websites and search for ESG you will be shown some amazing slides which walk you through the different initiatives they are doing, their targets to be net zero by 20XX and how they are moving to green options of energy etc. BP has been chosen for two reasons, firstly they coined the term carbon footprint and they have been on a large strategic journey recently to become ‘greener’. Eni was chosen due to being in the same field as BP but also because they were in the news recently in the UK.

Eni carries out oil and gas operations throughout the UK and has been in business since 1964. Recently Eni was ranked a top performer by three separate institutions, MSCI ranked them A for health and safety and carbon emissions performance, Bloomberg ranked them the highest performer out of their 17 other peers and Sustainalytics ranked them top 3% among peers. However last week they were in the news for an oil spill of over 80,000 litres of into the Irish sea which has caused tar deposits up and down the coast. Studies into the long term effects of oil spills are limited but research done off the gulf of Mexico has shown that oil deposits will sink to the sea bed where they slowly leach out over decades and effect generations of sea and plant life.

The above is one example of this environmental hazard and potentially the cause of the leak was completely out of Eni’s control. From an ESG perspective what does this mean to their score? Time will tell as it depends how they showcase their data and the timeliness of reporting. Remember there is no standard or ruling on ESG reporting.

If we look at BP over recent years they have truly worked hard to transition from an oil and gas producer to a green energy producer. They are working on numerous areas to drive green energy initiatives and tacking climate change in numerous ways. BP is ranked highly in many ESG reports however they still hold the record for the worst environmental disaster for oil spills, having beat the prior record by nearly 30%. The Deepwater horizon incident released 4.9 million barrels of oil or 312 Olympic sized swimming pools into the Gulf of Mexico in 2010.

To give an idea of continued destruction, three years after the incident crews in Louisiana removed 2,200 tonnes of oily material from a 55 mile stretch of beach, twice as much as the year prior. Infant dolphins are dying at a rate six times higher than normal, fishing and tourism in the industry was massively reduced, and further studies four years after the incident found deformities in the hearts of tuna which was leading to shortened life spans. BP admitted guilt to manslaughter and other offences, paid billions in fines, was restricted from contracts in the US and has paid billions in continued clean up costs a decade after the incident.

This is not isolated to oil and gas, there are numerous stories in the financial world where companies have failed their social responsibility by stealing, creating cartels, fraudulently manipulating rates like the LIBOR, and selling negligent financial services and products to unsuspecting clients.

Credit Suisse is in the news currently due to a whistle-blower leaking documents that show clients of Credit Suisse include human traffickers, torture, drug trafficking, money laundering and general corruption. The accounts amount to 30,000 clients all over the world with a monetary value in the bank for these clients amounting to £80 billion. HSBC was recently (Dec 2021) fined £64 million for anti-money laundering failings, this follows admitting in 2012 to allowing over $800 million to flow through their banking network which had direct links to the biggest drug cartel in Mexico, Sinaloa cartel.

Both Credit Suisse and HSBC have excellent ESG reporting standards with Credit Suisse ranked by MSCI at A and S&P CSA ranked in top 90 percentile. A recent report ranked HSBC as ranking 4th globally for ESG standards.

The above examples I have provided paint a very poor picture for ESG standards and rankings and may make you feel I don’t think ESG reporting is needed or worthwhile. After writing this I do have my doubts but I am a big believer in ESG reporting and the good that can come from it. The aim of this article is help showcase that ESG reporting has a long way to go. I feel there needs to be a standard and that it measures previous actions as well as current, data points and metrics are clearly defined and openness is required as to what the numbers actually mean.

The next steps for ESG I feel are rigor and process to be applied and for clear definitions of what is required, what is measured and what is not. Otherwise I feel that this key change in business direction will fall into another marketing gimmick.

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