ESG reports and ratings disclose valuable information for boards and executives to manage company operations. These reports and ratings also help investors determine the potential investment risks of an organization. Even though this information is heavily reviewed, there are still inconsistencies in how sustainability data is disclosed and measured. Because of these discrepancies, corporations, investors, and rating agencies all face numerous challenges to following ESG standards. What are the ESG challenges and risks?
CHALLENGES CORPORATIONS FACE
CHALLENGES INVESTORS FACE Investors heavily rely on service providers for ESG ratings, and the lack of consistent, comparable data makes it difficult for investors to render an investment decision. The ESG data is also commonly combined with other investment strategies. It can be challenging to determine if these ESG factors are the most relevant in projecting a corporation’s long-term value. Investors are not presented with the most accurate portrayal of an organization’s environmental impact. They may also have gaps in their understanding of current material ESG risks.
CHALLENGES RATINGS AGENCIES FACE Raters face the challenge of providing valuable and quality data for investors to use. Since the data they rate are not restricted to the same standards as financial data, the quality of their methods is at risk of varying and not providing an accurate image of the corporation’s operations. The final assessments are not comparable between agencies. On top of a lack of uniform requirements, rating agencies also face the challenge of adapting ratings to accommodate relevant issues, such as how companies have responded to the outbreak of COVID-19 and the Black Lives Matter movement. Rating agencies have to manage multiple elements while staying abreast of current issues.
With consumers and investors putting greater concern on environmental and ethical practices, organizations are under great scrutiny for how they perform and disclose pertinent ESG information. However, corporations are still facing the challenge of not having a standardized approach to managing and disclosing ESG data. Many organizations are self- reporting using various ESG metrics, and raters are using different rating systems themselves. Additionally, corporations are finding it challenging to report non-financial ESG metrics along with financial metrics. Often, accounting data does not accurately portray the benefits sustainability initiatives had on a corporation’s operations.
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