Evolution of ESG reporting frameworks

Abstract

In response to increasing investor demand for non-financial information from companies, a number of sustainability accounting frameworks have evolved to improve standardized disclosure of environmental, social, and governance (ESG) information. These frameworks have created more consistent, readily available, and easily interpreted information for investors to assess the sustainability impact of capital allocation choices. The data that is easy to collect and disclose is, however, far less valuable than information that must be gleaned through complicated processes, extensive due diligence, collaborations with subject-matter experts, and serendipitous insights. ESG frameworks thus face a difficult trade-off between standardized information that is widely demanded and cheaply supplied versus nuanced and esoteric information required to form the basis of strategies capable of delivering market outperformance. Investors seeking ESG-derived alpha must thus look beyond these standardized data sources and frameworks for their deeper and more idiosyncratic analyses.