But BlackRock has also been a critic of the patchwork of mismatched disclosures and metrics, arguing the standards for ESG measures need to be much more robust and consistent. In an October 2020 commentary called “Sustainability Reporting: Convergence to Accelerate Progress,” the giant asset manager said it has been calling for a wide embrace of more rigorous reporting standards that can be widely picked up by analysts to make apples to apples comparisons. It’s hard to create standards without benchmarks.

“The proliferation of disclosure initiatives, many of which are overlapping, has led to duplicative efforts by reporters and a lack of consistent and comparable data,” BlackRock said. “We believe that this could be resolved by aligning and converging to establish a globally recognized sustainability reporting framework and set of standards. Ideally, these would be developed by those with domain expertise in the private sector and supported by public policy makers as they move to require more comprehensive corporate reporting.” BlackRock applauded a group of accounting and standards organizations that had announced plans to forge those standards into something more seamless.

But doing so is difficult because ESG is not an asset class, say experts. It’s a factor overlay, and the U.S. Securities and Exchange Commission and others are trying to get a hold on where exactly that factor adds value. It’s hard to see whether it’s the “E,” the “S” or the “G” that’s rooting out long-term value. Thus, different companies have come up with a patchwork of “scores” to determine the materiality of an environmental or governance metric, and the materiality means different things to different companies. Bloomberg might boast 700 sustainability indicators on its terminals, but not all will matter to all investors poking around all the industries.

“Not all ESG issues matter equally,” Russell Investments said in a 2018 report, “Materiality Matters.” “For example, fuel efficiency has a bigger impact on the bottom line of an airline, than it does for an investment bank.”

The SEC said in a September subcommittee report on the topic: “Traditional investment styles such as growth/value can use commercially available third-party returns-based and holdings-based performance attribution systems to easily decompose sources of returns and see what bets the fund is taking, from security selection to allocation decisions. … ESG currently does not have such attribution systems.”

When it comes to investors in retirement plans, the safer bet might be active managers who use ESG as part of the investment process but compete with mainstream benchmarks, says Sarah Bratton, head of sustainability, North America at Schroders. “Thematic, impact and screen strategies are likely inappropriate,” Bratton says. “An issue for plan sponsors is how they are going to handle passive ESG solutions. Many of these indices are constructed utilizing third-party ratings that are a bolt on to the investment process rather that the embedded approach focused on materiality that active managers take.” So the passive approach—simply buying an ESG fund rather than going to an active manager who is looking at ESG as just one material aspect of a company—could be seen as non-pecuniary and thus scary to, say, a plan sponsor looking to avoid trouble.

Vikram Gandhi, a senior lecturer of business administration at Harvard Business School, teaches an MBA course called “Investing—Risk, Return, and Impact” that looks at how these factors come into play in a company’s analysis. He says the SEC has been hesitant to mandate some kind of consistent disclosure on ESG so that it becomes easier for investors and other stakeholders to “compare performances, measure and quantify externalities of companies.”

He notes the work of the Sustainability Accounting Standards Board, which has created a cross-listed “map” of industries next to a list of checkboxes enumerating which sustainability issues they might run into (the map is at https://materiality.sasb.org/). It includes a list of five broad categories, the environment and social capital being just two, which are then broken down further into subcategories such product safety, air quality, greenhouse gas emissions, cybersecurity, among others. These are then marked as either being material or non-material items across a broad swath of industries—health care, food and beverage, financials, etc.

Companies like asset management firms are going to require questions about consumer-initiated complaints about financial products. Tech companies are going to be asked about their data security and employee diversity. Iron and steel producers are going to be asked about their supply chain management. Miners are going to be asked about wastewater.

A lot of time, the problems of figuring out the value to a company depends on whether the management teams are thinking short term or long term. Because in the short term it might be hard to see how the value is created and the risk measured, Gandhi says.