Technological development can be described in three words: frenetic, degenerate, and materialistic. There is no doubt that the underlying motive of our innovations is to revolutionize the world for the better, and yet it often leads humanity down a deathly path. The ongoing demand for faster, better, yet cheaper products and services are driving companies and manufacturers to prioritize consumer desires over any other factors. This has led to a great degree of immoral, cunning measures to achieve tremendous results, which in return has led to an exploitation of nature’s gifts.

From climate change to the depletion of natural resources, humanity’s relentlessness in producing waste changed people’s perception of environmental sustainability. The responsibility of doing good for the environment is now not only encouraged on individuals but is also being required on large corporations. To show that they are taking action, companies are taking part in an evaluation composed of three pillars: Environmental, Social, and Governance (ESG). To assess ESG reporting methods and in particular, the environmental pillar (E-pillar), Korea University (KU) Professor Ok Yong-sik (Department of Environmental Science and Ecological Engineering) and Professor Rhee Jae-hyuk (College of Business) have published a research article titled Scoring Environment Pillar in Environmental, Social, and Governance (ESG) Assessment.

What is ESG?

According to Sphera, the leading provider of ESG performance data and services, ESG reporting refers to “the disclosure of data covering the company’s operations in three areas: environmental, social, and corporate governance.” Companies are evaluated and are given an ESG score based on their transparent reporting, which allows possible investors and customers to analyze a company’s operations and sustainability ratings. Taking part in ESG has become a top priority for corporations, especially ones that place importance on pleasing their consumers as well as contributing a sense of doing good for the world. The public now demands socially responsible practices and is set on buying products and services from companies that prove that they truly care about sustainability.

Limitations of the E-Pillar

Although all three pillars have significant value, the E-pillar has particularly gained a lot of attention due to it overseeing pressing environmental issues. On top of climate change and degradation of natural resources, the world is also dealing with high levels of pollution, disposal of hazardous waste, and reliance on fossil fuels. Due to these ongoing issues, companies are allocating more of their energy towards creating eco-friendly products and services that will give them an extra boost towards turning green.

Due to the large variety of problems that can be considered when measuring the E-pillar, this leads to different ESG scores based on the type of E-pillar parameter used. To investigate this in detail, the KU team took into consideration the findings of a review done by the Organization for Economic Cooperation and Development (OECD) titled ESG investing: Environment Pillar Scoring and Reporting created in 2020. The OECD analyzed different data from key rating providers such as Bloomberg, Thomson Reuters, and MSCI and compared these E-pillar metrics to the overall ESG scores in order to assess whether a high ESG score means that a company is environmentally aware or not.

The results were quite surprising. Unlike the common belief that high E-pillar scores indicated an overall low environmental impact, the OECD found out that this was not the case. By measuring four different parameters, among which are CO2 emissions, total waste produced, total energy used, and total water withdrawal, the OECD concluded that E-pillar scores do not always have a positive correlation with ESG scores. Based on the 2020 study, it was discovered that two of the three providers associated companies that had high ESG scores with a high level of CO2 emissions as well as a high number of total wastes produced.

KU’s Proposed Framework of ESG Calculation Methodology

The main reason behind such inconsistency is due to the different parameters, or categories, providers consider when calculating the E-pillar. Some providers may put more emphasis on the level of carbon emissions while others put more emphasis on the level of waste produced. In addition, according to the KU research article, “another major drawback of ESG scoring is the deficiency of quality ESG rating data. As highlighted by Bennani et al. (2018), ESG studies still rely on ancestral data from the last 25 years.”

To alleviate such limitations of the E-pillar, The KU team decided to propose a new framework of ESG score calculation methodology. As seen in Figure 1, the first step as mandated is to collect quality data as it is what lays out the foundation for an accurate ESG score. Resources from annual company reports, official websites, non-governmental organizations (NGOs), stock exchange filings, corporate social responsibility (CSR) reports, and reliable news sources are also recommended. It is important to note that the proceeding steps are what set this framework apart and work to fill in the gaps in previous methods of E-pillar measurement.

The second and third steps work to process the collected data. To do so, each rating provider needs to identify broad “key indicators such as emissions, water management, and climate change strategies” and then further break down these indicators into more specific categories based on certain characteristics and elements. For example, the emission indicator could be broken down into “CO2 emission, greenhouse gas emission, and fluorinated gas emission”. The last two steps involve statistically analyzing the data and coming to a respectable weighted ESG score.

ESG reporting is now more important than ever, with the coronavirus (COVID-19) pandemic bringing upon detrimental environmental side-effects. The world is now working towards going green, and corporations with the financial ability as well as the resources to influence people have a big responsibility to help in this continued effort. A major step to a greener future is to renew and refine current ESG measurements and acknowledge the fallacies of current limitations. KU’s proposed framework is sure to raise awareness on the importance of the E-pillar as well and gear towards the creation of better ESG scoring methodologies.