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Yale Initiative on Sustainable Finance (YISF)

Symposium Proceedings: Papers on the State of ESG Standards

YISF Symposia 2018 lecture

Editors: Todd Cort, Dan Esty, Diane Strauss

proceedings outline

Standardization of Environmental, Social, and Governance (ESG) information reported by companies to investors has been at the forefront of sustainable investment discussions in recent years. Financial regulators, stock exchanges, and voluntary standards boards have all offered various approaches for standardizing information. This has been in the interest of greater comparability of ESG performance and of providing information to support better investment decisions. However, there exists a great deal of confusion in the marketplace about the appropriate level and type of standards that both allow comparability and permit companies and investors to set their own ESG priorities and assess the materiality of their own ESG issues and strategies.

The YISF Symposium will be presenting rigorous thought and research into the questions surrounding Standards for ESG Integration and Disclosure. Thank you to Cary Krosinsky and his team for editorial assistance. 

Jump to a topic area:

History of ESG Metrics

New Data Framing

ESG Data for Private Equity

Impact of ESG Investing

Taskforce on Climate-related Financial Disclosures

Liability and ESG Disclosure


History of ESG Metrics. 

Todd Cort & Daniel Esty, ESG Standards: Looming Challenges and Pathways Forward | Presentation

Abstract: Calls for standardization of corporate sustainability data continue to mount as a growing segment of the mainstream investor community seeks greater clarity and comparability regarding relative company performance on environmental, social, and governance (ESG) issues.  But opinions as to the appropriate approach to developing such standards remain fragmented. In this article, we analyze the resulting challenge and conclude that the diversity of investor interests would be best served by the development of ESG data standards in three distinct areas. First, a coherent framework for sustainable investing requires methodological standards for ESG data collection and reporting. Second, value-minded sustainability investors need materiality-based standards to identify those ESG factors that drive risk and opportunity. Third, values-oriented investors want impact metric standards that demonstrate in a trusted and carefully structured manner the social and environmental benefits delivered by companies.


Robert G. Eccles, Linda-Eling Lee, & Judith C. Stroehle, The social origins of ESG? An analysis of Innovest and KLD | Presentation

Abstract: This paper uses the study of two cases to exemplify the “social origins of ESG” argument made by Eccles and Stroehle (2018). First, we recap the history and characteristics of two extremely different ESG data-vendors, KLD and Innovest. We show how the “mainstreaming” of ESG is linked to a market demand for ESG data with higher coverage, more consistency over time and a focus on financial materiality, driving the endurance of value-driven Innovest over the values-driven KLD within MSCI. Second, we underline how the creation of KLD assessments has fundamentally changed after 2011 and show how an additional layer of social construction is applied when academics use aggregate measures of KLD assessments. The paper joins the call for more explicit contextualization of ESG data and the social construction which underlies analyses with nonfinancial indicators.

(This paper is not accessible online due to authors request.)


Kristina Julie Rueter, Materiality in ESG | Presentation

Abstract: Materiality has evolved over the years as a means to assess the most significant environmental, social, and governance (ESG) data reported by companies and accessed by investors. However, reporting standards have increasingly converged toward more uniform sets of predefined material issues in the interest of comparability between companies and portfolios. We apply a critical lens to this evolution and argue that, while standardization is helpful for setting minimum requirements as a starting point, an overly simplified and rigid approach to materiality precludes potentially material data from ESG assessment and does not allow to adequately prioritize or allocate weight among various material issues. For the benefit of successful sustainable investment strategies, we argue for a more nuanced, company-specific, performance-related, and forward-looking materiality approach in ESG research is needed before exploring the implications for ESG reporting requirements.

New Data Framing.

Dinah A. Koehler & Ramon Sanchez Pina, Breaking Away: New Data and Models to Improve Investment in Corporate Sustainability 

Abstract: Despite the various weaknesses of self-disclosed highly curated corporate Environmental, Social and Governance (ESG) data, more investment professionals are experimenting with these data. Being resourceful and contrarian is core to effective securities analysis and successful investment. However, non-financial ESG data provides a limited view of corporate sustainability and requires additional analysis to become an essential ingredient to investment decisions. From the perspective of investors, objective, evidence-based metrics that capture fundamental drivers and risks can improve investment decision-making and build a competitive edge. Specifically, we suggest that the mosaic of information used by investors can be substantially expanded by drawing from environmental and public health scientists to construct entirely new models that link corporate activity with impacts on society and the environment. The approach explained here does not rely solely on corporate ESG disclosure to bring unique insight, rigor, and depth to securities analysis. It fully embraces the intention behind the "Mosaic Theory" by adopting a multi-disciplinary unconventional approach to investment analysis.


Decio Nascimento & Shivani PayalIndustry Classification and Environmental, Social and Governance (ESG) Standards | Presentation

Abstract: The paper explores a comparison between traditional classification systems and classification systems that take sustainability risks into account. GICS is the standard in the industry for sector allocation and risk management in portfolio construction. The Sustainable Industry Classification System (SICS) scheme, created by the Sustainability Accounting Standards Board (SASB), presents an alternative to GICS by aggregating companies that share similar resource intensity, sustainability risks, and opportunities. The better a system is in grouping companies with strong stock return correlations, the more relevant it will be for portfolio risk management and sector allocation. The paper will start by describing what classification systems are and why they are important. In the second part, attention is devoted to showing why sustainability concerns are important when talking about sector classifications. The third part calculates and compares the difference between the average within-industry and between-industry correlation of stock returns using GICS and SICS definitions. Also, attention is devoted to analyzing the effect of using the SICS on large-cap and small-cap companies and their comparison to the GICS. The fourth and final part presents the results showing that integrating sustainability factors on sector classification generates substantial positive impact. Given the ubiquitous implementation of GICS in the industry, the outperformance of this classification lowering the average correlation between each stock i’s return and the returns of all other stocks not in its industry could lead to a major shifting of standards in the industry, enabling better risk management and portfolio diversification, as well as better classification standards for stocks.


Union of Concerned Scientists, Improving Oil and Gas Climate Disclosures | Presentation

Abstract: Currently, disclosures of carbon dioxide and methane emissions by oil and gas companies are insufficient to make meaningful comparisons between companies, or to monitor companies’ progress toward commitments to reduce emissions across their supply chains. This information is material because these emissions are large, highly variable, and with proper incentives can be significantly reduced. Emissions from extracting oil and refining it into transportation fuels and other products used in the United States exceed emissions from using diesel fuel. Extensive peer-reviewed literature on emissions from oil and gas production at a field and country level demonstrates that comparing emissions from different types of oil is feasible and illuminating. There is an important opportunity to match these assets and their associated emissions with companies on an equity and/or operational basis. We propose a new set of metrics that would allow meaningful quantitative analysis of oil and gas companies’ climate-related performance and plans. Reducing emissions from the supply chains of fossil fuels is a necessary first step, but not ultimately sufficient to meet long-term climate goals. However, while many industries must cooperatively develop a low carbon transportation system, reducing oil and gas company supply chain emissions is firmly under the control of the companies themselves. By focusing on evaluating the various steps in oil extraction, processing, refining, and distribution, the metrics we propose can help motivate companies to chart a course consistent with keeping global temperature increase well below two degrees Celsius (2°C). 

ESG Data for Private Equity.

Hanneke Mol, Frank Wildschut, Simon Rawlinson & Alessandro CasartelliCash with a Conscience: Developments in the Field of Private Equity | Presentation slides

Abstract: This paper focuses on the differential approach to sustainability adopted by private equity fund managers (general partners, GPs) versus that of their investment partners (limited partners, LPs). To this end, we present the findings of an exploratory study on investors’ criteria for sustainable investments carried out by Arcadis in 2015. The hypothesis of this study was that a mismatch between the approach to sustainability adopted by private equity fund managers and their investment partners would be reflected in the expectation that (1) a small percentage (<25%) of the world’s largest private equity fund managers took steps to demonstrate their ability to measure the sustainability performance of their investments, and (2) a high percentage (>75%) of the world’s largest institutional investors operating as limited partners claim they measure the sustainability performance of their investments prior to acquisition. Here we discuss the findings of this study, after which we explore the observed differences theoretically by drawing on institutional theory, legitimacy theory, and signaling theory.

Impact of ESG Investing.

Costanza Consolandi, Himani Phadke, Jim Hawley & Robert G. Eccles, ESG Outcomes and SDG Externalities: Evaluating the Health Care Sector’s Contribution to the SDGs (A perspective on materiality and externalities) | Presentation

Abstract: The 17 United Nations Sustainable Development Goals (SDGs) have created a framework for environmental and social impacts, which many large institutional investors and an increasing number of corporations are using to guide their resource allocation decisions or highlight those already in place. In this paper, we argue that the SDGs have clarified certain elements that have been predominantly missing (or implicit) in many ESG (Environmental, Social, and Governance) standards and metrics, specifically focusing on the environmental and social externalities (social costs) created by companies.Using a methodological framework that maps the SDGs and their targets to the 30 generic issues developed by the Sustainability Accounting Standard Board (SASB), this paper focuses on health care as a case to evaluate the contribution of companies in this sector to the SDGs for which their material issues, as defined by SASB, are relevant. Issues not considered material by SASB are also evaluated. In doing so, we highlight where private sector firms can be (and have been) contributing to SDG impacts. Where that is either not occurring or perhaps not possible, the paper points to the need for public sector activities.


Julian F. Koelbel, Florian Heeb, Falko Paetzold, & Timo Busch, Beyond Returns: Evaluating the Social and Environmental Impact of Sustainable Investing | Presentation

Abstract: While many studies have examined the financial performance of sustainable investing, surprisingly little is known about the social and environmental impact of sustainable investing. One reason for this remarkable research gap is that investment impact is a phenomenon that spans across very different disciplines. This article addresses this research gap in three steps. First, it develops an impact evaluation framework for sustainable investing that summarizes the relevant mechanisms on how investments can translate into social and environmental outcomes. Second, it conducts a broad review of the literature that speaks to these mechanisms to establish the current stock of knowledge. Finally, it highlights critical research needs, points out data gaps that currently prevent the quantification of investment impact, and evaluates the investment impact of the most prominent sustainable investing (SI) strategies.

(This paper is not accessible online due to authors request)


Taskforce on Climate-related Financial Disclosures.

Erik Landry & Jason Jay, The Task Force on Climate-Related Disclosures: Design Decisions in the Context of ESG Reporting Standards | Presentation

Abstract: The Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) represent an effort to guide organizations as they attempt to disclose clear, consistent, and comparable information about the material climate-related issues they face. How do the design decisions made during the composition of the Recommendations assist or impede this effort? We examine three of these decisions, as well as their rationales and counterfactuals. Part I explores the contentious concept of “materiality” and the TCFD’s financially-oriented interpretation of the term. Part II examines the TCFD’s lean toward flexibility and the consequences this has on reporting comparability. Part III introduces scenario analysis and the TCFD’s decision not to recommend “reference” scenarios. While the TCFD provides a robust process for strategic thinking and disclosure of climate-related issues, these decisions may impede the usefulness of corporate disclosures to the capital market. With experience and refinement of the process through continuous communication and feedback, however, report preparers and users might be able to mitigate these concerns. Either way, the TCFD decisions could have potentially far-reaching influence on the forward evolution of ESG reporting standards.


Liability and ESG Disclosure.

Caitlin Ajax & Diane Strauss, Corporate Sustainability Disclosures in American Case Law: Purposeful or Mere “Puffery”? | Presentation

Abstract: Recent years have shown an uptick in lawsuits involving sustainability disclosures, or lack thereof, by companies. In the United States, litigation involving sustainability disclosures has primarily arisen in two statutory contexts: securities fraud (federal law) and consumer protection or consumer fraud (state and federal law). Essentially, these cases involve allegations that a company has either provided false and misleading information, or omitted information, about corporate sustainability practices. Misleading or omitted information may occur in the context of formal securities filings or less formal disclosures such as sustainability or corporate social responsibility reports, human rights documents, employer codes of conduct, or ethics and integrity statements. Plaintiffs in both securities and consumer fraud cases must generally show that the misleading or omitted information at issue was “material” to the plaintiff and that the plaintiff relied upon that information (or lack thereof) when making an investment or purchasing decision. In cases involving sustainability disclosures, there seems to be a difference in the latitude given to plaintiffs with respect to “materiality” and “reliance” based on at least one of three factors: (1) the statutory scheme and the type of interest the plaintiff seeks to protect (that is investors’ versus consumers’ interests); (2) the location in which the sustainability-related disclosure occurs or should have occurred (that is a formal securities filing versus a less formal sustainability statement); or (3) the form in which the sustainability disclosure is presented to the public, for example, whether information appears to be an affirmative statement of fact or an aspirational promise to engage in sustainable practices. Based on a close examination of existing U.S. case law, this paper takes the position that the third factor seems most important to judges when deciding if liability may be imposed in a sustainability case. As sustainability disclosure liability seems to stem from the form in which disclosures are presented, meaningful criteria is needed to help all stakeholders distinguish a “concrete” and “affirmative” sustainability disclosure from one that is merely “prospective” and “aspirational.”

(This paper, forthcoming in the Berkeley Ecology Law Quarterly, can unfortunately not be made available online).