Escaping the ESG Reporting Maze – Prioritise on Emissions Only

Prof. Janek Ratnatunga, CEO, CMA Australia & NZ

ESG Reporting is one of the hottest trends in business today. ESG stands environmental, social and governance (ESG) and refers to measures used by a company for the identification and quantification of its risks and opportunities in the environment and in society; as well as highlighting the ethics of a company.[i]

Such reporting and valuations are recognised as being particularly important in finance and investment. The idea is that investors should evaluate firms based not just on their commercial performance but also on their environmental and social record and their governance, typically using numerical scores. Most of the valuation and reporting approaches place the onus on individual firms to undertake an ‘internal ESG performance’ and then have it verified by an independent auditor.

The Institute of Certified Management Accountants (ICMA) has recommended an ‘external ESG performance’ approach where independent ‘judges’ measure a firms’ Economic, ESG and Empowerment performance with the objective of rating and ranking the quality and comprehensiveness of publicly available information to multiple stakeholders. This more akin to what rating agencies such as Dun & Bradstreet undertake in terms of ranking financial performance.[ii] [More on this later].

ESG is an attempt to deal with multiple and integrated issues: (1) the grave threat posed by climate change; (2) the need to safeguard society; and (3) the call to make capitalism work better. It is on the lips of bosses and officials everywhere. ESG has ballooned in recent years; with the titans of investment management claiming that more than a third of their assets, or US$35 trillion in total, are monitored through one ESG lens or another.[iii]

In its flagship Certified Management Accountant (CMA) program, the ICMA has always separated the ‘E’ and the ‘S’ from the ‘G’ by including ‘Environmental and Social Management Accounting (ESMA)’ as a separate topic to ‘Strategic Governance’ since the early 2000s. However, in the discussions of these topics, it is shown that E, S & G implementation, although well-meaning, is often totally confusing, deeply flawed and often more hype than reality. The end result is that far from being able to save the planet and the societies and businesses that feed off it, ESG reporting is actually causing more harm.

Several forces have thrust ESG into the mainstream. More people want to invest in a way that aligns with their perceptions and concerns about global warming and social injustice. Many people feel that as populous politics make governments impotent in ESG matters, business should solve society’s problems and serve all stakeholders, including suppliers and workers, not just shareholders. This noble cause has however been hijacked by the self-interests of the asset-management, business valuation and compliance industries (including accountants and auditors) – selling sustainability products, ESG valuation reports and compliance certificates. The ESG bandwagon allows these professionals to charge more, easing a long blight of falling fees. ESG reporting is seen as another ‘cash cow’, rather than any semblance of interest in saving the planet or humanity.

Unfortunately, today, ESG has morphed into shorthand for hype and controversy. “Climate cartels” are accused of causing the soaring prices at the petrol pump. Whistle-blowers accuse the industry of “greenwashing” by deceiving its clients.[iv]  Firms in multiple industries – banking[v], IT[vi], motor vehicles[vii] etc., are facing regulatory probes.

Why has ESG reporting become so controversial?

ESG suffers from three fundamental problems.

ESG’s first problem is that it lumps together an array of often unrelated list of 17 Sustainable Development Goals (SDGs)[viii] and provides no coherent guide for investors and firms to make the trade-offs between the three components of ESG. For example, closing down a coal mine is good for the climate but what happens to the suppliers and workers and townships where the mine is located. Then again, the Tesla electric cars significantly help tackle the climate, but the antics of its founder Elon Musk poses a corporate-governance nightmare. Also, can a firm build vast numbers of wind farms quickly without damaging local ecology? By glossing over these conflicts or pretending either that they do not exist or can be easily resolved – ESG fosters delusion.

ESG’s second problem is the ‘incentive’ to undertake ESG strategies. The link between virtue and financial performance is suspect. Whilst there is substantial research that claims that good behaviour is more lucrative for firms and investors, there is an equal amount of credible research that indicates that it is often very profitable for a business to externalise costs– such as pollution – onto society rather than bear them directly themselves.[ix]

ESG’s third problem is one of ‘measurement’. There are various scoring systems have gaping inconsistencies that can be, and are, easily gamed. Whilst company ‘credit ratings’ have a 99% correlation across rating agencies, ESG ratings tally little more than half the time. Firms can improve their ESG score by selling assets to a different owner who keeps running them just as before. There are numerous examples in Australia of Coal mines and coal-fired plants been sold to other owners in order to improve ESG scores.[x]

As management accountants, this whole area of ESG measurement needs to be looked at more closely.

ESG Measurement Issues

Within the current practice of business accounting, there is, strictly speaking, no such thing as ESG reporting. In the case of the ‘E’, i.e., the ‘environment’, what we have are two environmentally related reporting approaches (neither is simple) which includes: (1) the cost accounting of on-going environmental management activities, and (2) the evaluation of environmentally related investments.

In both these areas, management accountants face the longstanding problem of cost allocation.

First, how are we to know how much of an investment was ‘environmentally related’? For example, replacing old polluting equipment with a new cleaner one could have happened irrespective of pollution considerations if the equipment needed replacing anyway – because it had become obsolete or dysfunctional. Different rules can be, and have been, imagined, but without standardisation they are bound to appear arbitrary to some degree.

Second, we need to contrast ecological (EC) accounting with environmental impact (EI) accounting. While EI examines the impacts of environmental management on the firm’s future financial status; EC examines the impacts of the firm’s activities and its products on the external environment.

While EI accounting is mainly done in monetary terms, EC accounting is done in physical units, such as: (a) tonnes of CO2 or SO2 emitted per year; (b) kilolitres of wastewater into water bodies; and (c) hectares of land disturbed through logging, mining, or clearing, etc.

An obvious problem is consolidation and aggregation. How do you add up different physical quantities? One partial solution is ‘functional aggregation’. An example is in terms of global warming potential (GWP), where, for example, one kg of nitrous oxide is equated to 310 kg of CO2. However, different environmental functions cannot readily be aggregated (e.g., GWP cannot be aggregated with soil and water acidification potential).

Another aspect of ecological accounting appears when the focus shifts from activity-based to product-based accounting. The former leads to so-called eco-balance accounting, where a given economic unit uses an accounting framework in the form of an input-output materials balance – to track all potential pollutants and environmental impacts. On the input side you have natural resource use, and on the output side you have emissions to land, water, and air, as well as biological disturbances.

Product-based environmental impact (EI) accounting has led to so-called product Life-Cycle Assessment (LCA). Here the firm tries to account for the environmental impact of its products in terms of manufacturing, packaging, use and final disposal. Interestingly, this apparently technical issue has correlated with an intense debate on the firm’s responsibilities. For example, take the instructions on packages about how to use and dispose of the product. Just how far does a firm’s responsibilities extend beyond its field of direct control? Unfortunately, the legal aspects have far outperformed the technical ones. Thus, LCA is still a controversial technique that lacks the necessary level of standardisation, partly because it is so hard to standardise!

Given these measurement issues, let us now look at some popular reporting initiatives.

Internal Reporting Approaches

The Global Reporting Initiative (GRI)

Developed by the Global Sustainability Standards Board (GSSB), the GRI Standards are the first global standards for sustainability reporting and are a free public good. GRI’s framework for sustainability reporting helps companies identify, gather and report information in a clear and comparable manner of impacts on issues such as: (a) Climate change; (b) Human rights; and (c) Corruption.

First launched in the year 2000, GRI’s sustainability reporting framework is now widely used in more than 90 countries by: (a) Multinational organisations; (b) Governments; (c) Small and medium enterprises (SMEs); (d) NGOs; and (e) Industry groups.

The most recent of GRI’s reporting frameworks (there are many) are the GRI Standards, launched in October 2016. In contrast to the earlier reporting frameworks, the GRI Standards have a modular structure, making them easier to update and adapt (see Figure 1). To circumvent “greenwashing” or falsified reporting[xi], a financial institution (e.g., a bank) that provides funding based on a GRI report can: (a) conduct an independent audit of the investee, or (b) enter into a dialogue with the top management of the company in question.

Figure 1: GRI Standards – Universal, Sector and Topic

Integrated Reporting

The financial accounting and auditing profession’s first attempt to monetise the push towards ESG was the formation of the International Integrated Reporting Council (IIRC). The result was the push for Integrated Reporting (IR), i.e., an attempt to explains how the use of and effect on all the resources and relationships or ‘‘capitals’’ – human, natural and social, as well as financial, manufactured, and intellectual – on which the organisation and society depend for prosperity. IR attempts to show how these material elements of information affect the ability of an organisation to create and sustain value in the short, medium, and long term.

IR never gained acceptance by users and was heavily criticised for its focus on financial capital providers to the detriment of the information demands and needs of other key stakeholders. Also, with regards to the six capitals, the ‘subjective’ concepts of stock and flow of capitals created difficulties for organisations to explain some of their capitals beyond insubstantial narratives.

To provide a management accounting lens to IR, the ICMA suggested using the Balanced Scorecard concept of using ‘goals & measures’ in reporting the six-capitals and developed an ‘Integrated Reporting Balanced Scorecard’ to enable management to have a vision of the strategic implications of implementing integrated reporting in their organisations. The six-capitals were separated into measures of ‘soft capital’ and ‘hard capital’ as shown in Figure 2.

Figure 2: Integrated Reporting Balanced Scorecard

However, the biggest drawback was that, even with a balanced scorecard approach, IR reports did not have ‘one number’ to rank organisations. [A solution is given later in the form of the 5-Star Index’].

International Sustainability Standards Board (ISSB)

With the failure of gaining traction with their IR reporting framework, the financial accounting profession’s latest initiative was to launch the International Sustainability Standards Board (ISSB) with the objective of replacing (in their view) a confusing mixture of disclosure practices that some companies now use to assess the impact of climate change; and developing a single global disclosure standard for listed companies to report the impact of climate change on their businesses. This was indeed a lofty ideal.

The basic idea behind the ISSB was to set standards for reporting on a company’s performance on material sustainability issues; the rationale being that there is a strong relationship between financial and sustainability performance, and therefore, investors need relevant, reliable, and comparable information on both.

In essence ISSB reports was to concentrate on external ESG issues impacting firm value; whilst GRI reports were to concentrate on internal firm ESG issues impacting the external environment.

Despite many counter views that sustainability is disconnected from ‘enterprise value creation’ and ‘capital market efficiency’ – and that companies do not need such an added cost – the initiative was ratified at the 2021 United Nations Climate Change Conference in Glasgow (COP26). [The financial accounting lobby is very powerful].

The argument put forward, without any strong collaborating research evidence, was that companies will be able to provide a more complete view of enterprise value creation and show the inter-connectivity between sustainability related information and financial information. Further, it was argued by the financial accounting profession that an internationally harmonised set of sustainability metrics and standards should: (a) make the data on which investment decisions are made more reliable and comparable; and (b) lead to less costly due diligence, better investment pricing and ultimately stronger outcomes for investors.

Thus, the financial accounting profession argued that their ISSB standards will elevate sustainability reporting to the same level of rigour and acceptance as financial reporting!

Unfortunately, the reality is that ‘ISSB Sustainability Reports’ will be as fraught with similar valuation errors as ‘IFRS Financial Reports’, where intangible assets are completely ignored in the financial statements.[xii] It can be argued that the financial accounting profession is strongly supporting such mandatory reporting as it is another income stream for their members, rather than any benefit to investors or society.

External Rating of ESG Performamce (an Index)

The 5-Star Reporting Index

This is an approach suggested by the ICMA in 2005. In this approach, ESG performance is integrated with economic and HRM performance, and measurements are undertaken by external ‘judges’ (like any rating agency) – rather than ESG performance measured internally by the firm (to then be verified by external auditors). The objective of the 5-Star approach is to rate the quality and comprehensiveness (and therefore the understandability) of publicly available information to multiple stakeholders. The approach requires an external rating agency to collect and classify the information presented in annual reports, corporate webpages and other publicly available information relating to a firm’s Economic performance, its Environmental, Social and Governance (i.e., ESG) performance, as well as how it empowers employees.[xiii]

Information is collected in the 5-Reporting areas of Economic, Environmental, Social, Governance and Empowerment along the lines of a Control Framework as follows: (a) Primary Stakeholder Expectations; (b) Objectives; (c) Strategies; (d) Implementation; and (e) Results.

The 5-Star Approach has 5-steps as follows:

Step 1: Content Analysis of Publicly Available Information.

Step 2: Judge Ratings of Content (Rating between 0-5 of the Reporting on each criterion (strand) of the Control Framework).

Step 3: Development of Criterion Weights. The ICMA conducted 16 research symposiums in 12 countries (343 respondents) to determine stakeholder perceptions regarding the weights to be used. [Note that ‘Actual Implementation’ was given a higher weight than just stating a strategy that required future action].

Step 4: Multiply the Content analysis judge rated scores with the Criterion Weights to obtain a Group score for each Reporting area (i.e., Rate x Weight).

Step 5: Add the Group scores in each Reporting area to obtain a 5-Star score for the company (e.g., Max score 25 = 5-Stars).

There are 5 Steps to a better ranking for firms to focus on:

  • Higher weighting for voluntary disclosure of environmental, social, governance and empowerment data.
  • Higher weighting for implementing activities.
  • Providing quantitative measures to show progress and results is highly rated.
  • Good and bad news disclosures treated equally (disclosure is what matters).
  • Providing separate discussions for each of the “bottom lines” makes for greater transparency and easier analysis.

Dun & Bradstreet’s ESG Rankings

A more recent external ranking is the D&B ESG Ranking Framework. The D&B model is based on 31 ESG topics across 13 themes (4 Environmental, 6 Social, and 3 Governance) that comprise the D&B ESG Framework. According to their white paper, the D&B ESG ranking is calculated using data from a variety of government sources, public sources, private data sources, third-party certifications, D&B proprietary business information, as well as information provided to D&B by subject companies that has been validated by D&B where appropriate. D&B claims that it only assigns an ESG ranking to an organization for which it has sufficient data to adequately evaluate at least 4 of the 13 themes. Similar to ICMA’s 5-Star Ranking approach, the D&B ESG Ranking uses a 5-point scale to indicate levels of risk or performance in ESG.[xiv]

Prioritizing ESG Targets and Measures

As investors become wiser that all these reporting and valuation approaches are not actually helping to achieve sustainable development goals, they are growing more sceptical. By pursuing multiple objectives, ESG reporting has become a maze in which very little gets measured or reported to any degree of confidence. The more targets there are to hit, the less chance of achieving any of them.

Companies need to escape the ESG reporting maze by prioritising. The first step is to unbundle those three letters: E, S and G.

With regards to the ‘S’, in a dynamic, decentralised economy individual firms will make different decisions about their social conduct in the pursuit of long-run profits within the law. Tech firms may appeal to the values of young employees to retain them; firms in declining industries may have to lay people off. There is no one template.

With regards to the ‘G’, unfortunately most companies have taken a legal view to governance by adhering to a compliance ‘checklist’ based governance code. However, the art of management has too many nuances to be captured by box-ticking.

What we are left with is the ‘E’, the environment. However, the ‘environment’ is an all-encompassing term, including biodiversity, water scarcity and so on, and thus is not precise enough to prioritise corporate strategies. Even within the ‘E’, we need to focus.

With the world approaching the need for net-zero-emissions by 2030, by far the most significant danger is from emissions (e), particularly those generated by carbon-belching industries. Therefore, if companies need to prioritise their environmental strategies, they should focus only on ‘e’ for emissions alone. Investors and regulators are already pushing to make disclosure by firms of their emissions more uniform and universal. The more standardised they are, the easier it will be to assess which companies are large carbon culprits—and which are doing most to reduce emissions. Fund managers and banks should be better able to track the carbon footprints of their portfolios and whether they shrink over time.[xv]


ESG measurements and reports have become a maze of competing approaches that ultimately do not add much insight or value to decision makers. They are undertaken at great cost to companies and are a revenue source for professionals providing such valuations and reports. Better information alone will help in the struggle against global warming; but for this to happen, companies must escape from the ESG reporting maze and prioritise only on the ‘e’ – ‘emissions’. By revealing more accurately which firms pollute, it will help the public understand what really makes a difference to the climate. A growing number of altruistic consumers and investors may choose to favour clean firms even if it costs them financially. With regards to firms that persistently pollute, even if they can get away with it today, they should expect that tighter regulation of carbon emissions will eventually come and it would be wise to start measuring their risks and adapting their business models accordingly.

The opinions in this article reflect those of the author and not necessarily that of the organisation or its executive.



[i] Carl Hung (2021), “Three Reasons Why CSR And ESG Matter to Businesses”, Forbes, Sept 23.

[ii] Janek Ratnatunga and Stewart Jones (2012), “5-Star Reporting Index: Ranking Australian Companies on The Quality and Comprehensiveness of Their Company Reports” UniSA Business, 1(2): 34-36.

[iii] Economist (2022), “ESG should be boiled down to one simple measure: emissions”. The Leaders, Economist, July 21.

[iv] Economist (2021), “Sustainable Finance is Rife with Greenwash -Time for more Disclosure”, Leaders, Economist, May 22.

[v] Kay Rivera (2018), “Mortgage industry offence the Royal Commission missed”, Your Investment Property, October 4.

[vi] Tony Romm, et. al., (2020), “Facebook, Google, Twitter CEOs clash with Congress in pre-election showdown”, The Washington Post, October 28.

[vii] Janek Ratnatunga (2019) Why do corporations like Boeing and VW prematurely launch Killing Machines? On Target Newsletter, March-April, 23(2): 4-8.

[viii] United Nations (2022), The Sustainable Development Goals Report 2022,

[ix] Sanjai Bhagat (2022), “An Inconvenient Truth About ESG Investing”, Harvard Business Review, March 31.

[x] Nick Toscano (2022), “Cannon-Brookes demands AGL rules out ‘flogging off’ coal-fired power plants”, Sydney Morning Herald, May 30.

[xi] Paul Koku and Janek Ratnatunga (2013), “Green Marketing and Misleading Statements:  The Case of Saab in Australia”, Journal of Applied Management Accounting Research, 11 (1): 1-8.

[xii] Janek Ratnatunga (2019) “Why Audit Opinions are ‘Untrue’ and ‘Unfair’”, Journal of Applied Management Accounting Research, 17(2): 23-30.

[xiii] Janek Ratnatunga Michael Vincent and Leon Duval (2005) “The Need for a 5-Star Reporting IndexTM for the Ranking of Publicly Listed Companies: A Conceptual Framework”, Journal of Applied Management Accounting Research, 3(2): 1-20.

[xiv] Dun & Bradstreet (2022), “The D&B ESG Ranking model’

[xv] Op. cit., Economist (2022).

About Prof Janek Ratnatunga 1129 Articles
Professor Janek Ratnatunga is CEO of the Institute of Certified Management Accountants. He has held appointments at the University of Melbourne, Monash University and the Australian National University in Australia; and the Universities of Washington, Richmond and Rhode Island in the USA. Prior to his academic career he worked with KPMG.