How to Fix ESG Reporting

Investors, advocacy groups, academics, and the 200 CEOs of the US Business Roundtable have asked corporations to take on an added purpose beyond a narrow pursuit of shareholder value. In response, many companies now issue ESG (Environmental, Societal, and Governance) reports. These reports, however, are so broad in scope that they fail to address the unique measurement challenges within each of ESG’s constituent components. Moreover, the breadth of ESG reporting allows corporations to gloss-over (implicit) moral tradeoffs when their actions improve one of the reported ESG metrics (such as GHG emissions from its truck fleet) but worsen performance for an unreported metric (indentured labor used to mine minerals for electric vehicles’ batteries). Many ESG reports selectively present only those non-financial metrics favorable to them.

We propose improvements in ESG reporting by focusing on dimensions where broad societal agreement already exists about the preferred outcomes from corporate actions, such as reducing greenhouse gas (GHG) emissions and avoiding use of indentured labor in supply chains. In particular, we introduce a new and comprehensive system, based on well-established accounting practices, for reporting and transferring GHG emissions across corporate supply and distribution chains. This system eliminates the measurement problems in the current, widely used GHG-reporting standard, especially the feature that requires multiple counting of the same corporate emission. The new approach generates ESG data that are relevant and reliable, enabling better disclosure, governance, and auditing of corporate ESG performance.