Abstract
Climate change is the most pressing challenge of our time, and reducing carbon emissions is key to mitigating its possibly catastrophic effects. Many have warned us that we must reduce greenhouse gas (GHG) emissions in the United States by 50-55% by 2030 and reach net zero by 2050. This ambitious goal requires effort by all sectors of society, especially businesses, to reduce their environmental impact. As investors continue to increase their focus on sustainability, Environmental, Social, and Governance (ESG) ratings have become a key tool for assessing companies' overall impact. ESG ratings assess a company's environmental, social, and governance performance, including policies on carbon emissions and climate change. The scores help investors identify companies that are committed to reducing their environmental impact and hold them accountable for their actions. Without a standardized scoring system, many companies are improperly scored, and it discredits the potential of ESG scoring as a mitigation tool. In this policy statement, I recommend a standardized system that pursues a transparent and consistent ESG scoring system to put the onus on large corporations to help reach our global climate change goals. In order to reach our 50% emission reduction goal by 2030, a standardized ESG scoring system must be implemented to increase corporate transparency and encourage companies to make drastic sustainable changes.
Introduction
There is a global threat that has yet to be adequately addressed. Climate change poses catastrophic challenges that put our daily lives, ecosystems, and planet at risk. It is time to take action. In order to avoid any irreversible damage, it is imperative that the United States decreases its carbon emissions by 50%-55% before 2030. While individuals can and should take steps to make a personal environmental impact, the onus should be placed on large corporations and the governments who are regulating their behaviors. Many corporations are responsible for mass amounts of unnecessary waste and GHG emissions. They do not plan to stop, hoping instead to reduce their manufacturing and operating costs. Thanks to consumer pressure and increased demand for corporate transparency, it seems as if this is no longer a sustainable option for them. Environmental, Social, and Governance (ESG) scores have been implemented recently to evaluate a company’s efforts in these three sectors. Although this in theory is a great option, the system that we currently have in place is just the first step. It is time to use this tool to its full potential and explore ways to expand and rework the idea of ESG scoring to be a catalyst to completing our climate change goals. To reach our 50% emission reduction goal by 2030, a standardized ESG scoring system must be implemented to increase corporate transparency and encourage companies to make drastic sustainable changes.
ESG Overview
When approaching the issue of climate change, it is important to pinpoint the key contributors. Although we each play different roles in contributing to and or mitigating the effect of climate change, there is one undeniable key player – large corporations. The Guardian reported that “Just 100 companies have been the source of more than 70% of the world’s greenhouse gas emissions since 1988.” These large corporations are not only powerful in terms of wealth but also in their overall impact on the world. Holding corporations accountable is a pivotal step in protecting our planet from the irreversible damage that is coming our way. There is a system in place that focuses on rating a company’s impact within different societal sectors, it is known as “ESG Scoring.” Although this tool is mainly used in the finance community to create “green” indexes and mutual funds, it is not as straightforward as it may seem.
There is not one singular ESG scoring company or rating agency. This leaves average consumers and even portfolio managers confused and misled as each rating is based on different criteria and scored on a different scale. For example, MSCI (MSCI ESG Ratings), a leader in the ESG scoring industry, opts to use a rating system similar to that of your average creditor. Their “AA” and “AAA” ratings feel familiar to lifetime investors, and it allows them to create a false sense of credibility. Other rating agencies present their findings on different scales – Sustainalytics chooses to release “risk ratings”, ISS displays scoring based on many different visuals, including a star ranking, and other firms simply just rank companies based on their efforts. One can see the true discrepancy in scoring in Figure 1 below. Not only is the data ranked differently across the industry, but the data used in the process is also not verified or consistent. Many of these scores are completed based on third-party data. It has a strong potential of being outdated, or self-reported data which, if not properly audited, may be incomplete or even biased in nature. This lack of standardization and insufficient data makes it difficult for both consumers and investors accurately to gauge a company’s ESG efforts. While this is an incredible start to holding businesses accountable, the lack of uniformity and organization is severely hindering the true potential of the ESG scoring system.
Revitalizing the Structure
The current scoring system has the potential to be a catalyst for climate change mitigation, if developed properly. There are a few drawbacks that need to be addressed to make this scoring system as effective as possible: lack of uniformity, lack of transparency, and a lack of governmental pressure. This proposal would be written into legislation backed by both the Environmental Protection Agency and the Department of the Treasury. The goal would be to use current ESG scoring systems to create one universal, and easily understandable, reporting form for all companies to be required to submit annually – just like any other financial document. The proposal not only focuses on which company has the lowest emissions but on which companies are making the most progress. In order to stay up to date with our country’s values, a Materiality Report also will be conducted annually to ensure that these scores reflect the categories that carry the most weight for our communities. A company’s efforts will not only be scored annually but published publicly without the hindrance of a paywall to allow all consumers to make more informed decisions with this newly provided information. To take it one step further, when applicable, a company’s ESG score could be displayed on its packaging, much like nutritional and manufacturing location information already present on so many products. As consumers are said to “vote with their dollars,” this system allows them to make more informed purchasing decisions and grant more money to those making more responsible environmental and societal decisions.
We have seen the US government try to set carbon regulations through the Carbon Disclosure policy proposed by the SEC. It is important to acknowledge that there have already been efforts from the US government to increase transparency, but it is essential to implement this ESG system to ensure more than just carbon reports are being published annually. These changes implemented by the US government will not only push for a more green business world but will set the tone for a fair and equitable workplace for all stakeholders.
Potential Impacts
The climate impact of this proposal would be immense. With the introduction of transparency scores and regulations, corporations would have no choice but to comply with environmental recommendations to stay competitive in their given marketplace. Although companies would not be able to report on their initiatives for at least a year or two, their climate change efforts could start immediately. Due to the increasing importance of ESG efforts in a company, consumers and prospective employees would be able to hold businesses accountable by demanding these changes. Businesses not only benefit by maintaining a good relationship with their stakeholders, but also by saving costs! Reduction of energy consumption and material usage is just the tip of the iceberg when it comes to possible profitability for these corporations. Implementing green practices even holds the potential to lower wage expenses for companies. Forbes reported that “over 70% of people surveyed are more likely to work for a company that has a strong green footprint and nearly half of respondents are even willing to accept a smaller salary to work for an environmentally and socially responsible company.” These positive externalities go far past just meeting their compliance requirements. Transparency throughout supply chains will help minimize unfair labor contracts and wasteful manufacturing processes, and help create an overall tone for global supply chain sustainability. The World Economic Forum shared that “in the automotive value chain, we found that OEMs can achieve up to 60% emissions reductions through their supply chains with levers that cost them less than €10 per ton of CO2-equivalent.” Decarbonizing major supply chain systems is not only scientifically possible. It is financially possible. If companies have room to reduce emissions 60% just within the automotive supply chain, imagine the possible impact when these regulations break into even larger sectors like energy and all transportation! With the implementation of mandatory ESG screening and scoring, our society and government will be able to put pressure on companies to start making these sustainable changes that we know are possible.
Next Steps
Different factors contribute to the global emergency that is climate change. We need change, and we need change immediately. The answer is clear: Large corporations are the ones who are not only contributing mass amounts of emissions but also have the ability to change their practices. It is time to capitalize on our existing resources and make them better. ESG scoring was once a simple investment tool, but now has the potential to preserve our planet for generations to come. With the implementation of a mandatory and standardized ESG system, we will be able to dramatically decrease the amount of waste going into landfills and greenhouse gas emissions entering our atmosphere. A standardized ESG scoring system will not only dramatically cut our global emissions, but it will open up the world of ESG knowledge to the everyday person – propelling our society forward to increase awareness of climate issues. In order to reach our 2030 emission goals, it is essential to educate consumers and hold companies accountable for their actions. With pressure from the US government and the global action to follow, we will meet our climate change goals together.
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| Figure 1 |
Works Cited
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