When it comes to ESG scores, there is a lot of confusion over how companies are rated.
This was recently revealed in a recent article in The Wall Street Journal, which explained how companies like Tesla, Berkshire Hathaway, and General Motors have high ESG ratings in some indexes and low ratings in others. For instance, one ratings system has Tesla ranked at the top of the industry, and another has it as the worst carmaker on ESG issues. There is a lot of disparity between scoring systems on things like disclosure and emissions ratings.
The problem for boards—and their companies—is that investors are increasingly taking these scores as gospel. The WSJ article reports there is “billions of dollars of exchange-traded funds based on ESG indexes.”
“There’s a lot to shake out in ESG, which I think will happen, but it’s not going to happen..at the speed certain investors want,” says TK Kerstetter, Corporate Board Member’s Editor-at-Large and the CEO of Boadroom Resources.
Kerstetter says that this isn’t the first issue that investors have pushed boards on as it’s happened with regards to diversity and compensation as well. However, Kerstetter says that until boards start seeing dramatic steps from investors, such as withholding votes on non-compliance, he doesn’t expect it to be a major issue.
“I’m not sure how much time the will give [ESG], given [they have] very, very busy boardroom schedules on issues they know they have to be taken care of [such as [mandatory compliance and strategic planning. These are things they know will affect operating performance. In the end, that’s how boards still want to be judged – at least quantifiably,” says Kerstetter.
One area where metrics on ESG might make some head waves is through the Sustainability Accounting Standards Board (SASB). Kerstetter, who recently spoke with SASB’s David Post on the organization’s efforts to establish reporting standards that are both financially material and industry-specific. “I think [those metrics] may go a long way in helping this space get some true measurability,” says Kerstetter.
In the interview with Kestetter, Post says, “What we’ve found is that…companies have different perspectives on where this information should be reported, whether…the 10K or other locations. What we’ve really learned is that it’s a different evaluation process for each company, and it’s really their own journey.”
For boards, Kerstetter suggests they start making ESG disclosures that might not be as specific as investors would like, but at least lets them know they are aware of the importance of ESG in that organization. “I sympathize with companies trying to figure how this disclosure should work to meet the requests from different investors,” he says.