Navigating ESG Disclosure and Ratings’ Conundrum

Concerns regarding businesses’ social and environmental impacts have existed for many decades (Meadows et al 1972; Brown 1981). But measurement and reporting of these impacts gained substantial attention in the late 1990s and early 2000s (Milne and Gray 2013). The measurement and reporting were mainly aimed at plugging the growing trust deficit about the ability of the capitalist system to resolve the widening social inequality and degradation of the natural environment. It was increasingly felt that transparency through disclosures of information on the environment, social and governance (ESG) fronts would bring about changes in corporate behaviour, improve corporate accountability, and lead to better outcomes for employees, customers, the environment and local communities (Serafeim and Grewal 2016). The imperative to disclose was further triggered by the rising investor demand for value-relevant, non-financial information and increased risk perception among corporates (Bose 2020).

The term “ESG” emerged in January 2004, when the erstwhile secretary-general of the United Nations (UN), Kofi Annan, invited the chief executive officers (CEOs) of leading financial institutions to be a part of an initiative launched by the United Nations Global Compact (UNGC) with the support of the International Finance Corporation (IFC) and the Swiss government (Kell 2018). The initiative aimed to create a business case for embedding ESG in capital markets that eventually led to a report titled “Who Cares Wins” (IFC 2004). Around the same time, the United Nations Environment Programme Finance Initiative (UNEPFI) also released the Freshfields Report (2005), which reinforced the importance of ESG in the financial valuation process. These two reports eventually laid the foundation of the Principles for Responsible Investment (PRI), launched at the New York Stock Exchange in 2006. The collective assets under management (AuM) represented by all 3,826 PRI signatories (3,404 investors and 422 service providers) stood at $121 trillion as of 31 March 2021 (UNPRI 2022). In an earlier prediction by Bloomberg Intelligence, global ESG assets were expected to cross $53 trillion by 2025, representing more than a third of the $140.5 trillion in projected total AuM.