Riding the ESG investing rollercoaster and the safeguards that intelligent carbon accounting can provide

Once hailed as the poster child of investing, ESG (environmental, social and governance) reporting has been rapidly growing in recent years, with investors spilling trillions of dollars into funds that prioritise organizations with high ESG scores.

According to a PwC report, it is set to soar to a booming $33.9 trillion in 2026, making up 21.5% of assets under management globally. However, the ESG landscape has also seen controversy and criticism, with investors doubting the accuracy of these ratings and the perceived hypocrisy of certain higher-scoring companies. Some of the biggest investors in ESG funds are also involved in high-emissions companies, raising questions about their credibility and true commitment to sustainability.

The ascent of ESG investing can be attributed to various factors, such as the growing awareness and pressure to be more environmentally and socially conscious, as well as investors' increasing demand for transparency and responsibility. There has been a significant push on companies to disclose sustainability-related information, exemplified by the EU's Corporate Sustainability Reporting Directive (CSRD). Meanwhile, many investors are seeking sustainable and socially responsible investment opportunities due to concerns over climate change, resource depletion and social inequality.

ESG investing provides investors with a means to hold companies accountable for their ESG performance, thereby increasing transparency and accountability. Accurate and verifiable data is crucial to achieving reliable ESG reporting and this can help investors make informed investment decisions. Additionally, studies have indicated that companies with strong ESG performance are more likely to outperform their peers in the long run. Therefore, investors see ESG investing as an opportunity to generate attractive returns while supporting sustainable and responsible companies.

The recent MSCI shake-up downgraded hundreds of ESG funds, with thousands more to be stripped of their ESG ratings following criticism regarding the leniency and credibility of ESG ratings. Despite the popularity of ESG investing, some investors expressed their concerns that current ratings might not accurately reflect the true sustainability of companies. Concerns include:

There are different ESG reporting standards and a multitude of diverse metrics on environmental factors. This can result in inconsistencies and difficulties in comparing performance across companies and sectors. As self-reporting is often the case in ESG reporting, this also results in inaccuracies and, in a few cases, human error and data manipulation.

Granularity should be a significant consideration when it comes to ESG reporting. As an example, energy and carbon data for ESG reporting often lacks precision in evidencing sources and, in some cases, identifying opportunities or assessing the effectiveness of improvement measures.

ESG reporting often only covers a subset of a company’s activities, such as the direct emissions from operations and might leave out significant indirect emissions from supply chains and transportation.

Traditional methods of acquiring large amounts of data for annual ESG reporting is labour-intensive, time-consuming and limited. Energy providers also struggle with complicated protocols when collecting data from multiple devices and sites.

Inaccurate and incomplete ESG reporting could lead to companies over-emphasising their ESG credentials and flawed data might result in suboptimal investment decisions for investors. This compromises the credibility of ESG investing and results in a loss of investor confidence.

Focusing on the environmental aspect of ESG and utilising green technology tools to track emissions could be the key to sustaining the industry and preventing companies from engaging in greenwashing practices.

The environmental aspect of ESG could be the solution to sustain the industry. Social and governance factors remain important metrics, but they are often more difficult to quantify compared to environmental factors that have more readily available data, making it easier to measure and maintain consistency. This auditable data is crucial in preventing companies from engaging or being accused of greenwashing.

Although some areas, such as scope 3 emissions, remain difficult to measure, several green technology tools are now available to aid in the monitoring of emissions and enhance the accuracy of ESG reporting. These tools offer granular data on emissions, facilitating the identification of areas for improvement. They can:

By utilising carbon accounting, companies can effectively measure their carbon footprint and report it accurately. The integration of AIoT monitoring and analytics offers a real-time view of a company's carbon emissions, enhancing accuracy through the efficient processing of large amounts of data, patterns identification and anomaly detection. This integration ensures the reliability and comprehensiveness of reports, enabling organizations to optimise power consumption and energy procurement strategies.

To gain more meaningful insights into a company's ESG performance, it is essential to move beyond broad-level data and focus on increasing data granularity. This involves extending data collection to emissions by product line, facility or building, enabling companies to have a comprehensive understanding of their carbon footprint and to take action to reduce emissions. IoT sensors provide detailed real-time data that can be integrated with other ESG data to provide a more complete picture of a company's environmental impact.

The utilisation of digital twin technology can substantially improve ESG reporting by creating a digital replica of physical assets and processes. This enables companies to monitor environmental metrics in real-time and identify potential risks and opportunities, ultimately allowing for optimised operations and risk mitigation.

To conclude, the rollercoaster of ESG ratings shall not obfuscate the urgency to address climate change. Most of the challenges that come with ESG reporting, such as lack of accuracy, transparency and consistency in ESG ratings, need mitigation. Technology can play a key role in enhancing ESG reporting by providing more reliable, auditable, granular and certified data on emissions and climate impacts. By improving ESG reporting and investing in technology, we can not only avoid the risk of greenwashing but also create more opportunities for positive change and innovation in the face of a climate crisis. Maybe this will also prevent people, including billionaire celebrities, from calling it a scam.