Corporate Social Responsibility, ESG, and Compliance

Abstract

As the trend of Environmental, Social, and Governance ("ESG") 1 investing has risen, so too has the influence and relative importance of ESG rating agencies. With an increasing focus on social corporate responsibility, the ability to project a positive image around ESG-related topics is critical. As such, more companies have begun making select and unaudited disclosures in an effort to attract ESG-investing capital. The arbiters for obtaining this capital are the major ESG rating agencies.However, individual agencies' ESG ratings can vary dramatically. An individual company can carry vastly divergent ratings from different agencies simultaneously, due to differences in methodology, subjective interpretation, or an individual agency's agenda. There are also inherent biases: from market cap size, to location, to industry or sector -all rooted in a lack of uniform disclosure.

How to combine ESG scores? A proposal based on credit rating prediction

“…The latter is aimed at evaluating the degree to which companies are sustainable, that is, how they perform their business activities in relation to the external stakeholders and taking into account the economic, environmental, social, and time factors (Lozano, 2012, 2018; Muñoz‐Torres et al, 2019). Environmental, Social and Governance (ESG) factors are often taken as a proxy for the sustainable behaviour of companies (Pollman, 2022). Environment factors relate to the impact on the environment deriving from the production of goods or services and include carbon emissions, preservation of the natural environment, biodiversity protection, and waste and water management (European Commission, n.d.; Financial Times, n.d.; Robeco, n.d.).…”

“…and applies proprietary methodologies to combine information and produce a synthetic measure of ESG behaviour. These different methodologies yield different measures, that often produce divergent results (Berg et al, 2022; Dorfleitner et al, 2015; Abhayawansa & Tyagi, 2021; Dimson et al, 2020; Billio et al, 2021), yielding to potential ‘sustainability arbitrage’ as recently discussed in Pollman (2022). Additionally, ESG scores are sometimes computed on the availability of information relating to ESG issues and this favours larger firms that have a higher availability of information (Drempetic et al, 2020).…”

“…The latter is aimed at evaluating the degree to which companies are sustainable, that is, how they perform their business activities in relation to the external stakeholders and taking into account the economic, environmental, social, and time factors (Lozano, 2012(Lozano, , 2018Muñoz-Torres et al, 2019). Environmental, Social and Governance (ESG) factors are often taken as a proxy for the sustainable behaviour of companies (Pollman, 2022).…”

The Purpose of a Company

“…35 Probably the main reason for such orientation is the historical concept of the "enterprise in itself" (Unternehmen an sich). 36 Inspired by Walter Rathenau's influential booklet "On the Nature of Shares" (Vom Aktienwesen), 37 the enterprise was understood as an amalgamation of the capital, work, and the public good, which has its interest, separate from the interests of its shareholders. 38 Such understanding left its mark on the German Stock Companies of 1937 (Aktiengesetz 1937), which stated that the management board manages the company in the interests of the business (Betrieb), its followers (Gefolgschaft), the whole nation (Volk) and the realm (Reich).…”

Research and evidence-based standards paving the way for a digital and sustainable transformation of the built environment

“…To accelerate sustainable transformation, the UN launched its Principle for Responsible Investing and coined in 2004 the term “environmental, social and governance” (ESG) through its “Who cares wins” report (Billio et al , 2020; Pollman, 2022). The report aimed to increase “the awareness of all involved financial market actors” (The Global Compact, 2004).…”