ESG Reporting, Is It Sustainable

Harvard Business Review (HBR) has published many articles on corporate ?environmental, social, and governance (ESG)?policies and strategies. It’s good to see the business community engage, and their reporting highlights many challenges in framing global sustainability problems in the language of corporate reporting and financial markets.?An HBR article by Kramer and Pfitzer indicates that most companies still treat sustainability as an afterthought versus an essential component of corporate strategy. Unfortunately, heightened corporate attention to ESG reporting has not changed the way companies make decisions about strategy and capital investment. An HBR article by Crowley and Eccles argues that the key will be returning ESG to its original and narrow intention to help companies identify and communicate long-term ESG-related risks to their investors.?

Narrow versus Wide ESG Definition

I do not believe a narrowing definition of ESG reporting is appropriate because the costs of climate change and pollution appear on corporate balance sheets as expenses largely outside the control of corporate ESG action reporting.?

Here are three examples of why climate impacts affect companies’ operations, risks and finances in ways beyond their direct control:

1. Pollution. Ambient air pollution has a significant, negative impact on national economic development, social welfare cost, and health outcomes like disability and mortality. Pollution related disability and mortality impacts employer’s available workforce, and increases the cost of public and private health insurance.
2. Property. Insurance markets are financially efficient and actuarily sound in distributing the increasing costs of climate risk. As increasingly violent weather patterns create more property losses, some businesses and their customers will be unable to afford insurance. If ESG reporting corporations are indeed not collectively implementing sustainable strategies then insurance marketplaces will continue to pass on costs caused by their role in affecting climate change. Reinsurance companies and government insurance market incentives can distribute the risk but will not reduce it.
3. Inflation. Frequent droughts, heat waves and floods may lead to inflationary pressure on commodity and food prices. A working paper on the role of central banks argues that macroeconomic models that omit climate-related impact on inflation are likely to be inaccurate. The paper explains that macroeconomic models should account for the impact of climate change on public and private insurance markets, but the paper does not specifically mention that both health and property insurance should be included.

Can ESG reporting survive?

Corporations will continue to manage their labor, property costs through competitive insurance market procurements, labor force investments, supply chain efficiencies, and facility planning. However, an increasingly uncontrollable proportion of corporate costs due to climate change will affect their operating environment. Corporate procurement strategies and human resource actions cannot overcome climate forces in the long run if they do not include

• Will narrowing the definition of ESG serve to obscure the rising climate related costs in a corporation’s balance sheet?
• Will adding climate change and pollution elements to central bank macroeconomic models cause corporations to acknowledge their roles in collective inflationary pressures?