When I talk with clients about ESG, the one point that always occurs is that ESG Is hard from a data perspective. Not just figuring out the ESG categories but also getting the data right. And that is without incorporating the carbon offset aspects into your risk and compliance controls and data systems. And now I am going to suggest it should be ven harder.
Why? Because the stark supposition of accuracy and precision protrayed in ESG reporting is a facade. And reporting should list some of that facade. Here is what I propose:
First, there should be multiple categories of carbon mitigation. The list would look like:
Second, companies should be required to track and report their ESG efforts based on the categories above. The carbon offsets based on probabalistic calculations should be gathered to calculate the range - the expected value they are relying on as well as the upward and, especially, downward limits of what may actually be achieved.
Third, companies should be required to have the same accoounting and risk control programs on place regarding their carbon related investments. In is not just possible but, in my opinion, highly likely that some comapny in the next five to ten years will have a huge restatement in the financial reports because they have determined that their investment in carbon offsets will produce significantly less carbon offsets i the future than they have estimated. And that would lead to a write down in asset value.
Finally, there need to be standards for reporting what happens if a company determines its prior ESG reports were incorrrect. Will this cause a restatement of prior financial returns? Is there a shareholder cause of action (think institutional investors with a stated "sustainable" focus) because their investment in the firm was induced by incorrect financial reports? Currently, to DCM's understanding, restatement of ESG voluntary reporting is also voluntary. Itshould be noted that some firms have voluntarily restated prior year information in their voluntary report - one instance we found had the information on restatements in a footnotes in a data appendix with no indication of the amount of change. If ESG reporting is supposed to let investors know how firms are assisting in energy transformation and decarbonization, then adjustments - especially those that indicate prior year information overstated corporate achievements - should be up front and direct.
All of this makes ESG reporting harder but investors have a right to know what company efforts really entail and how they are performing.