By Mark Ortega
Environmental, social, and governance (‘ESG’) reporting is increasingly practiced by companies. But is ESG reporting good or bad for the environment? How might we even approach such a question? The investigation of this question lies at the heart of my paper, ‘[ESG] Reporting from an Environmentalist’s (Not Investor’s) Lens’, published in (2023) 47 Environs: Environmental Law and Policy Journal 52-104.
I conclude that ESG reporting, on the whole, promotes environmental goals. Therefore, environmentalists should support them, but with caution and scrutiny. ESG reporting’s dual goals (as discussed below) should be kept distinct, and its zones of discretion should be monitored and managed. Without such scrutiny, ESG reporting could do more harm than good.
Environmentalists and Environmental Goals
An environmentalist is anyone who values the environment, and believes it is worth protecting. Understood this way, most of us are environmentalists. Environmentalists seek to achieve environmental goals. These include: (i) achieving ‘sustainability’ (i.e. giving future generations the same environmental ‘goods’ as we have); (ii) improving environmental quality; (iii) improving corporate behaviour impacting the environment; and (iv) enacting the environmental laws we need. ESG reporting can be assessed against these environmental goals.
ESG Reporting’s Dual Goals
In ESG reports, companies report on their environmental and social (‘E&S’) impacts. These impacts are either framed as creating risks to the company and its investors (‘investor-centric’), or as generating risks and harms for people and the planet (‘environmental & social-centric’ or ‘E&S-centric’). These represent two very different dimensions of ESG reporting, which should be kept separate. If the dual goals of ESG reporting are not kept distinct, there is a danger that ESG reporting’s investor-centric goals will overshadow its E&S-centric goals.
ESG Reporting’s Logic of ‘Persuasion’ and Role as ‘Gap Filler’
E&S-centric ESG reporting seeks to improve companies’ environmental performance through the regulatory logic of ‘persuasion’. ESG reporting gets corporate leaders to ‘stop-and-think’ about their E&S impacts. In this way, it indirectly encourages companies to improve their impacts on people and the planet. The public nature of ESG reports also improves accountability to various stakeholders, including governments, non-governmental organisations, investors, supply chain partners, employees, customers, and local communities. This accountability serves to indirectly pressure corporate decision-makers to improve their companies’ E&S impacts.
In this way, ESG reporting may serve as an imperfect, but important, ‘gap filler’. Often, democratic rule-making processes do not yield the environmental laws that are needed. ESG reporting can fill that gap. But here caution is needed. ESG reporting may cause more harm than good if, by filling that gap, the public may reduce their support for environmental laws that are needed. This is the ‘negative spillover effect’ risk of ESG reporting.
Yet ESG reporting can also have a ‘positive spillover effect’. Privately-driven ESG reporting can increase support for publicly-mandated ESG reporting regimes. For example, where companies get used to ESG reporting, it is easier to adapt to and comply with mandatory reporting regimes.
An Assessment Framework for ‘Private Environmental Governance’
The concepts of imperfect ‘gap fillers’ and ‘spillover effects’ draw from Prof. Michael Vandenbergh’s seminal 2013 article, ‘Private Environmental Governance’. There, Vandenbergh described how so much of environmental governance is, in practice, shaped by private governance mechanisms. These include governance standards in supply chain contracts, standards drafted by private standard-setters, among other initiatives.
In arguing why private environmental governance (‘PEG’) matters, Vandenbergh argued that PEG measures can serve as gap fillers, and may give rise to positive and negative spillover effects. PEG measures may also positively change corporate behaviour and, in this way, improve environmental quality.
These concepts provide a valuable framework towards assessing PEG measures generally, and ESG reporting specifically. Privately-driven ESG reporting is a PEG measure. Publicly-mandated ESG reporting is not a PEG measure, but encourages ‘voluntary’ changes in corporate behaviour through the logic of ‘persuasion’. In this sense, it has a PEG component.
Assessing PEG from an Environmentalist’s Lens
Putting all these together, I assess ESG reporting in terms of its potential spillover effects, and impacts on corporate behaviour and environmental quality. In doing so, I hold ESG reporting to the lower standard of an imperfect ‘gap filler’.
In my paper, I highlight significant empirical studies which broadly demonstrate the positive impact of ESG reporting, particularly as it relates to corporate behaviour. In one particularly notable study, the impact of mandatory ‘corporate social responsibility’ programmes was shown to have a direct impact on environmental quality. Other behavioural studies demonstrate the impact of both positive and negative spillover effects, in relation to other PEG measures like carbon ‘nudges’.
I also survey the texts of leading ESG reporting standards (e.g. Global Reporting Initiative and Sustainability Accounting Standards Board) and sample ‘sustainability reports’ to unpack how they work in practice. I also discover ‘zones of discretion’—areas of significant discretion on what and how to report on companies’ ESG risks and impacts.
These observations support my conclusion that environmentalists should support ESG reporting with caution and scrutiny. In particular, ESG reporting’s dual goals should be kept separate, and its ‘zones of discretion’ should be managed.
Keywords: ESG Reporting; ESG Disclosure; Sustainability Reporting; Private Environmental Governance; Corporate Behaviour
AUTHOR INFORMATION
Mark Ortega is a Teaching Assistant for Torts and Equity & Trusts at NUS, Faculty of Law.
Email: m.ortega@nus.edu.sg