Recently, I came across an intriguing article in Economic Times that featured an interview with Ethan C. Rouen, a professor at Harvard Business School, on the topic of Environmental, Social, and Governance (ESG) reporting. In this article, we will take a look at the differences between the old and new approaches in ESG reporting, highlighting the key developments and changes that have occurred over time.
By Rusen Kumar
As environmental, social, and governance (ESG) issues become increasingly important for companies, the way in which they report on these issues has also evolved. As the world becomes increasingly aware of the impact of business on society and the environment, the concept of ESG reporting has gained significant attention. ESG reporting is a method for companies to disclose information about their impact on the environment, society, and governance, and it has become a crucial tool for investors to assess a companyโs long-term sustainability.
Introduction
Firms are under increasing pressure from some of their largest shareholders to disclose information related to ESG factors. With the shift in ownership of shares from individuals to large asset owners like BlackRock, Fidelity, and Vanguard, there is a growing demand for meaningful and actionable disclosure of ESG information. Ethan C. Rouen, a professor at Harvard Business School, discusses the evolution and background of ESG reporting in this article.
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Background of ESG Reporting
Ethan C. Rouen’s research focuses on a corporation’s obligations beyond its shareholders. He examines what a business owes to society and how to better track and document these obligations. One of the most important findings in his new research is that investors are still looking for meaningful and actionable disclosure and firms aren’t providing this at a sufficient level. However, the world is moving towards better ESG disclosures, and businesses are beginning to follow even voluntary standards.
Language and Content of ESG Reports
According to Rouen, the language and content of ESG reports are both moving targets along two dimensions. First, firms are starting to disclose more financially material content for investors. In the past, ESG reports were less focused on financial materiality, but now firms are gravitating towards discussing topics that are more relevant to investors. The second dimension is how quickly the language and content of ESG reports are changing. For example, the terms ‘virus’ and ‘vaccine’ were not commonly used in ESG reports a few years ago, but now they are among the most common terms. Similarly, ‘animal welfare’ is now a frequent topic in ESG reports as firms are facing greater regulatory risks in this area.
Pressure on Firms to Disclose ESG Information
Rouen states that firms are under increasing pressure from some of their largest shareholders to disclose ESG information. In the past, most shares were held by individuals, but now they are controlled by large asset owners who own the whole stock market. These companies are less concerned about which individual company beats another, but rather the sustainability of the system. They want to ensure that all firms work together to stabilize the system and ensure its longevity.
Material Disclosures in ESG Reports
Rouen’s research has found that there are 26 different topics that can be financially material in ESG reports. Companies are disclosing more information on human capital, such as employee turnover, which can impact firm value. Additionally, companies are disclosing more information on carbon emissions, which can indicate the efficiency of their operations.
Future of ESG Norms
Rouen believes that we are moving towards officially set uniform ESG norms in the future. The European Union (EU) has already begun to implement such norms, and other regions may follow suit. However, it will take time for these norms to be fully implemented and for companies to comply with them.
Comparison of Old and New Approaches in ESG Reporting
| Old Approach | New Approach |
| Limited disclosure of ESG information | Greater transparency and meaningful disclosure of ESG information |
| Voluntary reporting standards | Adoption of mandatory reporting standards |
| General language and content in ESG reports | Specific and financially material content in ESG reports |
| Limited concern for ESG issues | Greater focus on ESG issues as a measure of corporate responsibility and sustainability |
| Limited pressure from shareholders for ESG disclosure | Increasing pressure from shareholders, particularly large asset owners, for ESG disclosure |
Conclusion
ESG reporting is an evolving field, and companies are under increasing pressure to disclose information related to environmental, social, and governance factors. Investors are looking for meaningful and actionable disclosure, and companies are beginning to follow even voluntary standards. The language and content of ESG reports are rapidly changing, and companies are disclosing more financially material information. The future of ESG norms is uncertain, but we may see more regions implementing officially set uniform norms in the future.
About the Author
Rusen Kumar is the founder and managing editor of India CSR, a publication on CSR, sustainability and environmental affairs. He has expertise in governance, leadership development, social development, human development, and strategic focus. He serves on for-profit and not-for-profit boards and advises CEOs and executives. His accomplishments in social enterprise, planning, and governance include knowledge forum initiatives and advancement of corporate social responsibility issues in India.
