Despite the huge differences between ESG and financial reporting, we believe that practices developed in financial reporting can contribute to achieving high-quality ESG reporting. In particular, we suggest that a comprehensive framework for ESG reporting must address the following three factors:

  1. A limited set of metrics, primarily concerned with a company’s key environmental and social impacts. Part 1 of this chapter summarizes the current state of the measurement of companies’ ESG outcomes—particularly the E&S factors, sometimes referred to as “planet” and “people”—and the prospects for improvements. It concludes by describing the requirements of a full-fledged social accounting framework. Part 2 samples the existing reporting requirements for some basic environmental and social issues. Our goal is to explore the possibilities for developing a robust framework and scalable system that captures a company’s major E&S effects.
  2. A standard-setting body modeled on the Financial Accounting Standards Board (FASB) to develop and particularize those metrics. In Part 3, we suggest that the lessons from financial accounting are instructive in developing an ESG standard-setting body. Financial accounting went through a series of standard-setting bodies before creating the FASB, and FASB is commonly thought to be more successful than its predecessors due to its greater financial, industry and political independence.
  3. Reporting infrastructures that allow companies to collect, report, and verify the relevant metricsThe reporting framework must produce information that is accurate, objective, and verifiable, but the history of financial reporting has demonstrated the difficulty of generating this type of high-quality data without formal processes and procedures. Thus, in Part 4, we show that companies need robust internal and external reporting frameworks (i.e., internal control systems and third-party auditors) to generate the underlying data and verify the reported information.

Read the full article about ESG metrics by Neil Malhotra, Paul Brest and Colleen Honigsberg at Stanford Social Innovation Review.