Lack of a uniform ESG rating system: As of 2022, there were over 140 ESG data providers. Each has its own research and scoring methodologies for calculating ESG scores. An OECD investigation of various rating agencies found notable variations in ESG ratings from the agencies for the same company.¹ In our experience, we also find notable differences between expectations and guidelines from various ESG data providers.

For instance, corporate policies related to ESG can be treated and assessed very differently across providers. Some may consider all publicly available data, while others only use company-provided data. Some providers might focus only on actual numbers for emissions and other quantitative data, while others want to consider intensity data as well. A further illustration of this point is how to assess disclosures regarding policies. While some providers look for a detailed, separate policy addressing a specific issue, others will accept generic catchall statements from sustainability reports or other documents. For example, on climate-related commitments, one client was looking for a policy specifically addressing the issue. Meanwhile, another client wanted coverage of policy statements from CSR reports but also wanted evidence of a specific focus on reducing the impact. For this same issue, one client was okay with mere adherence to legal requirements, and another wanted to focus on company statements going beyond the law.

Nestlé, the Swiss-based multinational food, and drink company, provides an example of a company striving to meet or exceed ESG reporting expectations. The company’s ESG reporting efforts are well received by third-party ESG raters, having earned a spot on the FTSE4Good Index since 2011 and rated AA by MSCI ESG Research in 2022.² A reason for Nestlé’s effective performance is the strategic approach it appears to take towards ESG disclosures. Like many companies, it uses multiple frameworks for reporting, providing data according to the GRI, SASB, and TCFD framework requirements. Nestlé also regularly conducts stakeholder engagement to assess issue materiality.³ In addition to standard ESG disclosures, Nestlé also provides reporting on an issue of particular concern for their industry, specifically regarding the production of baby formula or Breast Milk Substitutes (BMS). Nestlé reports on its compliance with World Health Organization (WHO) guidelines and its policies to ensure implementation of the WHO International Code of Marketing of Breast Milk Substitutes and corresponding national regulations.⁴

Lack of Standardised ESG Disclosure Frameworks: Research shows that almost half (45%) of valuation experts feel that the absence of a standardized reporting framework is the biggest obstacle for companies when disclosing their ESG data.⁵ In our experience, the GRI framework historically has been the most followed reporting framework, with many companies further supplementing that information with SASB or reporting according to TCFD requirements and sometimes reporting data for all three. While reporting according to a single framework, like the GRI, can satisfy multiple stakeholders, saving time and effort, it inevitably means falling short of other expectations captured by other frameworks. Indeed, rather than using just one, most companies use multiple frameworks when reporting their ESG data. Indeed, according to a survey by Duff & Phelps, companies employ more than 14 different combinations of frameworks for their ESG reporting.⁶ This means companies often report the same data multiple times, depending on the frameworks followed. Not only does this increase the chance for confusion by end users as well as reporting errors, but more importantly, it increases the costs in time and effort for companies.

A positive development towards framework standardization is the IFRS’ creation of the International Sustainability Standards Board (ISSB), which recently issued two reporting standards, IFRS1 and IFRS2. This effort effectively aligns and merges SASB and TCFD to streamline and standardize reporting. With the consolidation by the IFRS, Evalueserve expects a leveling of the playing field for corporations by easing the reporting burden and improving consistency across disclosures.

As a result of these challenges, producing ESG data requires special tools, dedicated training of a specialized team, and a rigorous approach to ensure reliability and completeness, and to provide clients with output that meets their business needs. These topics will be covered in more detail in Part 2 – Lessons Learned from the production of ESG data.

To access the full publication, click the button below to download it.