Judging organisations on their good corporate citizenship – their environmental, social and governance standards – is all the rage these days.

But there are two big questions  – what is ESG exactly, and how do we measure it?

“There is no globally agreed definition of the term ESG, let alone what ‘good’ might look like, whether in relative or absolute terms”, KPMG says in a report last year looking at the ESG needs of financial institutions.

“In contrast to financial accounting regulation, there are no standardised definitions of ESG reporting – either what it means or what is required.”

And no standardised definitions mean no standardised ways of measuring an organisation’s ESG performance.

Researchers from MIT’s Sloan School of Management recently looked at the work of six leading ESG ratings firms and concluded that “rating from different providers disagree substantially” – on average around 50 per cent of the time.

That’s not to suggest number fudging. But outcomes will inevitably vary depending on your chosen methodology and what weighting you put on the elements of your overall assessment.

The other big problem is data and the way it’s handled.

KPMG says a survey of more than 100 banks and other finance sector companies found they regarded the lack of relevant data as the single greatest challenge preventing them from adequately addressing climate risk.

“In some areas of the social and governance elements of the ESG agenda this problem is even more acute,” it says.

PWC, in a recent analysis of the ESG reporting of Australia’s top 200 public companies, raises questions about the quality and processing of the data that is collected.

“Currently, in most instances, the systems, processes and controls supporting ESG data at both management and governance level are not as robust or as mature as those supporting financial reporting,” PWC says.

“In many instances the data is captured in spreadsheets, with issues of consistency of data capture across operations, lack of data entry controls, access management and system documentation.”

There is also often an “an absence of back-up processes and a higher propensity for transposition errors as a result of human error and a lack of formalised review and sign-off controls”.

And that, according to PWC, is “building as a perfect storm on the horizon when stakeholders are increasingly demanding investment-grade information”.

This isn’t just a problem for big companies. You can guarantee that governments and their agencies will increasingly be demanding more and more ESG information from more and more companies.

PWC notes that “globally, a convergence of standards is occurring and a sophisticated regulatory system is emerging”.

The United Kingdom and the European Union in particular are leading the way by mandating specific ESG disclosures, such as  climate-related financial disclosures  and “detailed disclosures on the extent to which a company’s revenue is sustainable”.

What’s the answer?

You can do what the Queensland Government did recently and get an external agency to give you an ESG rating.

You may not know this, but the Queensland Government now has an MSCI ESG Rating of AA, Trend Negative.

MSCI is Morgan Stanley Capital International, a leading ESG rating agency. Its ratings run from AAA to CCC. Queensland’s AA rating, which it received for the first time in mid-2020, means the state is a “leader” in terms of “managing the most significant ESG risks and opportunities”.

In short, a good mark, apparently, although “trend negative” suggests there’s still some work to be done.

I’ve tried to find something on the public record to explain exactly what this means but without much success.

I’ve found no detailed explanation of how MSCI came to its conclusion or what’s behind the trend negative assessment.

I did however discover the Government’s inaugural “Sustainability Report” published in November last year which details the state’s ESG-related commitments and outcomes.

It’s apparently pitched at the investment community.

“The focus areas have been informed by market research to identify relevant areas of interest to investors, rating agencies and other financial stakeholders,” it says in part.

But it reads more like a pre-election, government-achievements document given the once over by the Treasury boffins.

It’s hard to believe that presumably sophisticated investors in government bonds need this sort of simplistic reassurance that the Queensland Government is, in its own assessment at least, doing a good job at being a responsible corporate citizen.

But the ESG bandwagon has well and truly left the station.

And that means even more hoops for organisations to jump through even if we’re not quite sure how big the hoops should be or why it is some of the hoops are there in the first place.

Even those companies with only the best of intentions are going to find it a challenging time ahead until we work out just what ESG is and how to measure it.