How much is too much?
With the recent publication of the IFRS’s ISSB Standards and their alignment with the TCFD reporting guidelines, an interesting question has arisen: how much standardization is too much standardization? The ESG market has grown exponentially over the last decade to include hundreds of rating agencies, alignment principles, consultancies, and more in an ever-evolving alphabet soup. For many, standardization will be a relief as it saves hours upon hours of digging through methodologies to figure out what exactly something is measuring or asking for. However, there are potential drawbacks.
Having so many options encourages competition and provides choice. As the ESG industry has evolved, there has been a notable focus on environmental issues, which is perfectly logical considering that it is the easiest aspect of ESG to quantify, thus measure, track, and score. If a stakeholder were interested in a different angle, there are options that weight the separate ESG metrics differently, thus offering either a more or less biased ESG score.
As arguments within the ESG landscape evolve, so too will the ESG products. If everything is standardized, there is increased risk of biases being more deeply woven into the fabric of ESG. Too little standardization, and the lack of continuity between ESG scores will render them virtually useless. The answer here, perhaps, is less about standardization and more about regulation and transparency.
If ESG firms were to be required to verify data and firms were required to submit unbiased third party audits, more trust could be built into the system as a whole. If ESG firms committed to more transparency and accessibility, with clear and easy-to-access presentations of their methodology biases, then stakeholders could choose what best meets their own needs. As it currently stands, the lack of overlap between ESG scores leads to confusion, frustration, and obfuscation.
This approach to standardization cannot be taken as a box-ticking exercise. If ESG efforts are to be genuinely impactful, they need to be appropriately communicated and verified. There is a long way to go before we get there, but I, for one, am genuinely optimistic.