The Fraser Institute has published a new essay stating that a universal environmental, social and governance (ESG) reporting framework, similar to that used in financial reporting, would post serious implementation and enforcement challenges, making any uniform set of ESG reporting standards extremely costly and impractical.
Entitled ESG: Myths and Realities, the Impracticality of Standardizing ESG Reporting, the essay discusses the challenges related to identifying ESG materiality. “Given the likely divergence of viewpoints on the importance of specific ESG issues, standardizing ESG disclosure across public companies will inevitably involve value judgements, thereby making the process political and costly,” they write.
“Broad standards would leave more room for managerial interpretation of what specific ESG information should be reported and could therefore result in ESG misreporting. On the other hand, were specific standards to be applied generally, it would likely be that the standards would not fit the circumstances of any particular firm, and hence, would be of limited value to any set of stakeholders,” they add, saying common standards are challenging to develop because ESG metrics are highly subjective and lack external reference points. They also point to the challenge firms face in providing information which may reside outside of their legal jurisdictions.
They say today there are more than 600 ESG reporting frameworks in use, many of which conflict with one another. “Not surprisingly, some investors have expressed concern about a lack off comparable and reliable ESG information they claim they need to properly factor ESG consideration into their investment decisions.”
The essay continues with a look at where the demands for standardized information are coming from and efforts underway by reporting institutions, including the International Financial Reporting Standards (IFRS) Foundation, which has unveiled a new board with plans to develop a set of global, uniform ESG standards, similar to what the IFRS boards do in the context of financial reporting.
“In practice, serious implementation and enforcement challenges would arise from mandating a uniform ESG reporting standard for public companies,” the Fraser Institute paper states. “We argue that implementing and enforcing and standardized ESG reporting framework that is applied to all public companies is economically impractical, if not technically impossible.”