Journal Name: Environs (Davis): environmental law and policy journal

Volume Number: 47

Issue Number: 1

Abstract:

This paper assesses environmental, social, and governance (“ESG”) reporting from an environmentalist’s lens. There are two broad goals of ESG reporting: (1) reporting on environmental and social (“E&S”) impacts (“E&S-centric goals”),
and (2) reporting on how these E&S impacts translate to financially material risks and opportunities to a corporation (“investor-centric goals”). Environmentalists scrutinizing ESG reports should ensure that E&S-centric goals and investor centric goals are kept conceptually distinct. Environmentalists should focus on preserving the E&S-centric goals, which are at risk of being overshadowed by an institutional analogy to financial reporting. Environmentalists should also
carefully scrutinize “zones of discretion” in ESG reporting practices and leading ESG reporting standards, as a strategy to limit greenwashing and related harmful practices.

ESG reporting driven by private parties, sometimes called “voluntary” ESG reporting, is a form of private environmental governance (“PEG”). ESG reporting mandated by governmental institutions, sometimes called “mandatory”
ESG reporting, is a public law tool of persuasion that relies on encouraging privately-driven improvements to control corporate environmental behavior in the absence of more direct, prescriptive, publicly-mandated laws targeting
corporate behavior. These privately-driven aspects of ESG reporting can be assessed as a form of PEG. This paper uses a “PEG Assessment Framework” to assess ESG reporting, focusing on the role of ESG reporting as an imperfect “gap
filler,” its potential for positive and negative spillover effects (i.e. the likelihood it will facilitate a movement towards, or displace, respectively, more “optimal” publicly-mandated environmental laws), and empirical evidence showing causal connections between improved environmental corporate behavior and improved environmental quality.

There is some empirical evidence that ESG reporting (particularly E&S-centric ESG reporting and publicly-mandated ESG reporting) can improve environmental behavior and environmental quality, particularly in an environment of lax public regulation. From an environmentalist’s lens, such empirical evidence supports the desirability of ESG reporting as a gap filler and a tool of persuasion. However, ESG reporting’s pro-environmental gains must be balanced against potential risks of negative spillover effects in all its forms (including displacement of its E&S-centric goals), and strong anti-greenwashing laws and careful scrutiny of “zones of discretion” are needed. Environmentalists
should advocate for such governance measures as part of a broader push for publicly-mandated ESG reporting focused on E&S-centric goals.