ESG Disclosure and Sustainability Transition: A New Metric and Emerging Trends in Responsible Investments

Abstract

Abstract Environmental sustainability, social engagement and robust governance gained growing attention from consumers and investors alike, leading to what we call ‘ESG finance’. ESG criteria are now shaping the behaviour and choices of enterprises, investors and consumers. Indeed laudable, the increased importance of ESG finance could raise concerns about the robustness underneath this new set of financial products. Moreover, the reliability of ESG-related data and information shared by companies may also be challenged due to the ability of those indicators to shape the public profile of companies and their attractiveness for investors. A new breed of ESG rankings and ratings is widening the metrics that consumers and investors use to make informed decisions about their consumption and investment. Yet, such rankings and ratings hinge on the individual disclosure approaches of the interested companies. This article wishes to complement available data and information about specific emissions data released by companies with the ESG disclosure levels, in particular relating to the “environment” dimension. Based on these disclosure levels, the authors build a new metric with the purpose of reducing asymmetric information and promoting more responsible investment. Starting from ESG-related data and publicly available information, a new disclosure-adjusted pollution index (namely, the GHG Scope-1 DAdj index) is developed. The second part of the article puts forward an empirical analysis on the basis of this new index, suggesting that the rush to ESG finance could be poised to generate leeway for new types of asymmetries and possible distortions in investment decision-making, also providing grounds for potentially reckless speculative attitudes, especially in the domain of product development of financial instruments that may generate new forms of risk for investors. Using the GHG Scope-1 DAdj index makes a few companies less environmentally friendly and interesting for investors who are seeking responsible and sustainable investment options. The innovative index and the empirical analysis lead the authors to suggest to “split the domains of ESG” to better gauge the relation between impact and compliance costs for companies as the individual components of environment, social engagement and governance are considered separately.