In case you missed it, the USDA's Food Pyramid was replaced in 2011 by an equally creatively named 4 segmented plate called MyPlate. The original pyramid, which urged the public to USE SPARINGLY fats, oils, and sweets, fell out of favor as our understanding of a healthy diet evolved. While far from perfect, MyPlate's simple to understand principles serve as a starting point for more nuanced conversations and decision making.

Like a healthy diet, it is difficult to create a one size fits all definition for corporate sustainability and Environment, Social, and Governance (ESG) principles. What is healthy for you to eat might not be healthy for me and what is an ESG friendly practice in one industry might not apply to another. Investors, regulators, and the public all demanding improved ESG transparency has resulted in a dizzying array of governing bodies, ESG ratings providers, and environmental certification bodies. In this week's blog post, we take a closer look at the key players in the world of ESG.

At the top of the ESG landscape pyramid are international reporting framework bodies. These entities provide guiding principals that promote transparent and consistent ESG reporting standards. These entities are needed for three reasons:

1) By creating a single definition of ESG, these bodies help investors to quantify and compare the ESG performance of one firm to another

2) Financial reporting has had many decades to arrive at reporting standards, ESG has not and how metrics are reported lacks consistency

3) Unlike financial reporting, most companies lack dedicated ESG reporting groups, making consistent reporting a challenge

A summary of the key players is provided below:

In November 2020 SASB and The IIRC announced they would merge to become the Value Reporting Foundation and more consolidation is expected as the world moves towards a single overarching ESG reporting standard.

ESG Raters

Using the metrics outlined by international reporting frameworks, many organizations offer ESG ratings designed to help investors screen companies by ESG performance in a similar way to how credit ratings allow screening based on creditworthiness. The ESG ratings agencies considered to be of the highest quality according to the firm SustainAbility's "Rate the Raters 2020" study are, RobecoSAM, MSCI, CDP, and Sustainalytics. These entities all consider slightly different scopes (attributes such as GHG emissions and community impact), different indicators to quantify those attributes, and different aggregation rules to compute final ratings.

Unlike credit ratings from different agencies, which have a 0.99 correlation, ESG ratings have been found to correlate poorly, 0.61 on average according to MIT's 2020 study "Aggregate Confusion: The Divergence of ESG Ratings". This poses a challenge to investors and corporations alike and suggests better communication is needed between firms and raters.

Environmental Certification

While ESG raters compare all types of industries, environmental certifiers focus much more closely on the environmental component of ESG. Current reporting regulations for emissions typically rely on averages such as emission factors and assumptions of normal operations rather than direct quantifications of emissions. Independent certification allows for consumers to have more confidence in the hydrocarbons they purchase and enables producers to offer a differentiated product.

Measurement and Hardware

What frequency and detection limits are needed to verify emissions data is an open question. As satellite, aircraft, and sensor detection technology providers continue to work with operators to collect data, the understanding of what is practically and economically feasible will continue to be refined. While current guidelines from the EPA may not be nuanced enough to meet the ESG transparency needs of the industry, if the food pyramid can transform into a plate, then these guidelines can evolve too.

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