Composite or Component-wise ESG Reporting: A Tangle

Abstract

Non-financial reporting, mainly called environmental, social, and governance (ESG) disclosures, depicts the future corporate plan apart from current corporate actions and is getting substantial attention amongst the corporate world, policymakers, and academics. ESG disclosures indicate how companies can address environmental and social challenges, setting a high standard of governance mechanism. Due to increased ESG awareness, stakeholders expect companies to engage in sustainable practices that could even exceed the mandatory disclosure requirements. Such pressure has compelled companies worldwide to improve their ESG disclosures. ESG rating providers attempt to measure companies’ ESG performance against the benchmark, focusing on the influence of ESG disclosures on financial performance. Although the composite ESG scores have a broader preference in assessing the companies’ comparative performance, those scores are unlikely to depict their real impacts on the stakeholders. Considering the inherent limitations of the composite ESG scores, the present qualitative study motivates the exploration of whether component-wise ESG scores could better address the limitations of the composite ESG scores.