While Preqin’s research is focused on private markets, the issue around ESG reporting and measurement also spills into public markets as well.

A report from MIT’s Sloan School of Management and London Business School last year highlighted big discrepancies in ESG measurements.

The authors of the report, Aggregate Confusion: The Divergence of ESG Ratings, concluded that the “ambiguity around ESG ratings is an impediment to prudent decision-making that would contribute to an environmentally sustainable and socially just economy”.

Florian Berg from MIT’s Sloan School of Management did acknowledge ESG rating is still a young field, and “the definition of sustainability is by nature a fluid one”.

“What’s important today might not be important tomorrow,” he says.

Transparent and consistent measures

Be that as it may, the evolving nature of ESG measurement is proving a challenge to investment managers and firms such as BlackRock have been advocating for more consistency in terms of measurement.

Head of Wealth for BlackRock Australasia, Chantal Giles says the company has been advocating for consistent standards “for a really long time” as one of the founding members of the Taskforce on Climate-related Financial Disclosures (TCFD) in 2016.

Giles says one challenge is that companies tend to look at ESG considerations in different ways.

“Disclosure can be cumbersome and the variety of reporting frameworks creates further complexity for companies,” she says.

“Which is why over the past several years, BlackRock has been advocating for more widespread and standardised adoption of sustainability reporting.

“We believe that enhanced reporting is critical to the ability of companies and investors to take into consideration material environmental, social and governance (ESG) risks and opportunities. Better quality information leads to better investment decision-making and capital allocation. ”

MSCI’s global head of Applied ESG & Climate Research, Miranda Carr, says that after almost 20 years of data collection and analysis, people want greater consistency in terms of how ESG performance is reported and ensuring everyone is basically singing from the same song sheet.

“For example, you have to make sure that one company’s not reporting absolute emissions, the other company’s reporting intensities, another one’s reporting percentage changes,” Carr says.

According to Carr the way in which ESG standards are taking shape is not dissimilar to how financial accounting standards were formulated back in the 1920s and 1930s.

“There has been a lot of back-testing and analysis to ascertain which metrics are financially material, which ones are nice-to-haves, and which ones are more focussed on the external impact on stakeholders or the environment,” says Carr.

Carr says we are starting to see some consistency in the data and frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) for climate reporting have “made a massive difference in terms of standardising the approach, how the metrics are reported, and also what people should be disclosing”.

“We are now seeing that stretch into the international sustainability accounting standards now under development by the International Financial Reporting Standards Board.

“And that may lead to standardisation across all of the E, S and the G issues,” Carr says.

The greenest firms can have ‘issues’

Yet while there will be standardisation, Carr points out not all investors look at all ESG factors in the same way.

For example, people might prioritise environmental versus social versus governance issues.

A good example is Tesla, which built three-quarters of new electric cars in the US last year and score highly on the environmental side of things but have also been marked down because the minerals used to make their cars sometimes come from mines with poor labour conditions, and as reported by the Financial Times, the company has been criticised for racial discrimination and bad working conditions in its factories.

“So, an electric vehicle company might be revolutionising the auto industry and transportation, but they may still have issues on workforce issues and on corporate governance.” Carr says.

“It depends on the investor’s investment objectives. If an investor is considering all of the financially material aspects, then they should be considering a company’s ESG rating, whereas if an investor is 100 per cent focused on climate in terms of their investment consideration, then they may just focus on the E pillar and a company’s climate impact.”

Carr explains that MSCI ESG ratings aim to measure a company’s resilience to long-term, financially relevant ESG risks, and the ESG model identifies ESG key issues that are most material to the sectors that companies belong to. ESG risks and opportunities can vary by industry and by company, and the rating shows how well a company manages those risks relative to their peers.

“This means we are not assessing necessarily every single company on every ESG issues, like, for example, biodiversity and land use for something like a software company, because that’s not going to be particularly relevant to their business or financial performance,” Carr says.

“But we would consider biodiversity and land use for agricultural companies, resource and mining companies, and also where there might be intensive land use such as hotels and resorts.”

Carr says the debate is continuing to evolve as investors are now looking at broader sustainability issues impacting the environment and taking a whole supply chain approach.

“There is increasing requirement for companies not only to have scopes 1 and 2 disclosures, but to include all of the supply chain including scope 3 into their net-zero long term targets. Knowing the carbon emission of suppliers becomes an important factor in purchasing decisions of some large agricultural buyers.”