If you own stocks, chances are good you have heard the term ESG. It stands for environmental, social and governance, and it’s a way to laud corporate leaders who take sustainability – including climate change – and social responsibility seriously, and punish those who do not.
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Carbon emissions are another example. Many companies, such as Timberland, have claimed great successes in reducing emissions from their own operations. Yet the emissions from their supply chain partners and customers, known as “Scope 3 emissions,” may remain high. ESG rating firms have not been able to adequately include Scope 3 emissions because of a lack of data: Only 19% of companies in the manufacturing industry and 22% in the service industry disclose this data.
Another important ESG metric concerns consumer protection. Amazon prides itself as “Earth’s most customer-centric company.” However, when its customers have been injured by products sold by third-party sellers on its platform, Amazon has argued that it should not be held liable for the damage, because it functions as an “online marketplace” matching buyers and sellers. Amazon’s foreign third-party sellers are often not subject to U.S. jurisdiction so can’t be held accountable.
Other countries are adding pressure Currently there is no unified reporting standard, so different companies may cherry-pick certain ESG performance measures to report to boost their sustainability and social ratings.
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