Accurate Environmental, social and governance (ESG) reporting is nigh-on impossible because of the existence of private companies within supply chains, according to Larry Fink, chief executive of the world's largest fund manager, BlackRock Inc (NYSE:BLK).
Fink, a champion of sustainability and ESG investing, said there was a “structural problem” for larger firms wanting to report on their ESG as private companies within their supply chains are not held to the same standards as those that are publicly listed on stock exchanges.
Supplying insight on 'scope three' emissions - those outside of a firm’s direct control - creates an issue, Fink said.
“Companies are very willing to report one and two [scope emissions],” he said, referencing those produced directly and from purchased energy.
“But to report Scope 3, then you were reporting on your supply chains and most of your supply chains are private companies on the supply side.”
The BlackRock chief executive highlighted this as “the structural problem we’re facing in society today”.
BlackRock has been front and centre of an ESG movement that has mushroomed in the last five years, although the company has been targeted from both pro- and anti-ESG proponents over its commitment - or alleged commitment - to funding companies with better standards.
The US Securities and Exchange Committee, meanwhile, highlighted ESG funds as one of its key priorities to scrutinise in 2023, assessing whether they are appropriately labelled and are advertised in investors best interests.
Even with criticism, ESG standards have become increasingly “high on the agenda for institutional investors and consumers,” says Antoine Argouges, chief executive of activist investor Tulipshare.
A growing market, the global value of ESG focussed funds is set to hit US$50trn by 2025, equalling roughly one third of traded assets, according to Bloomberg analysts.
In light of this growth, many companies have looked to report their own ESG related movements in a bid to attract investors.
In these thus-far standardised reports, companies will often lay out policies to tackle climate change, explain how staff are looked after and discuss measures to ensure financial sustainability.
A score can also be given, including from third parties Bloomberg, Morningstar Sustainalytics, Dow Jones and RepRisk, often ranging from zero to 100.
According to Bloomberg, ratings are in part governed by shareholder’s rights, diversity audit risks, health and safety and air quality, to name a few.
Since different firms often score firms based on varying categories, ratings should be taken with a pinch of salt, suggests Conservice ESG consultant Jazon Krychiw.
Still, firms with better ESG scores will often be preferred by investors, he said, given they have “typically fewer liabilities” and should attract the top talent.
Higher ESG ratings will usually be given to companies which provide more information on such practices, Krychiw adds, making transparency a key feature to look out for in reports, prior to proposed regulation which has already been hinted at by the US, UK and European financial watchdogs.