The Standardisation of ESG

Abstract

This research delves into the standardization of ESG investing, an area of growing interest due to the increasing focus on sustainability by individuals and the demand for sustainable investment options from financial service providers. However, assessing a company's sustainability practices remains challenging for consumers, given varying ESG scores and complex regulatory frameworks used by agencies. Moreover, the issue of green hushing, where companies promote sustainability selectively, makes this even harder. The study highlights the evolution of ESG from socially responsible investing (SRI) and the need for coherent guidelines to enhance credibility and comparability of ESG ratings. It suggests a detailed, industry-specific approach for better governance consideration. ESG serves as a bridge between financial considerations and broader environmental, social, and governance concerns. It allows evaluation of companies' sustainability practices. The challenge lies in ensuring ESG covers all businesses while accounting for their diverse characteristics. ESG ratings show variation due to the unique attributes of different industries, and non-financial measurements lack precision. To address this, ESG must be industry-specific and transparent to allocate capital effectively, supporting low-carbon transition and sustainable growth. Creating reliable metrics, similar to the credit rating industry, can promote fair competition among businesses and prevent greenwashing. The focus must be on business-specific criteria rather than a one-size-fits-all approach.