How to Leverage Corporate Sustainability Ratings to Drive Reductions in Greenhouse Gas Emissions: A Policy Proposal for the Next U.S. Administration

Abstract

For decades oil and gas corporations have been major contributors to global warming and its harmful effects on the environment and economy. Yet global efforts to hold these and other carbon-intensive companies accountable and pressure them to reduce their greenhouse gas emissions (GHGs) have so far been ineffective. Corporate environmental, social, and governance (ESG) ratings have the potential to help drive down GHG emissions, by measuring and comparing how different companies are managing their impact on the environment. ESG ratings have existed over 20 years and are a thriving niche in the financial services sector, but their lack of consistency and credibility have limited their influence. With some modifications, ESG ratings could help hold companies accountable for their environmental performance, similarly to how corporate credit ratings hold companies accountable for their creditworthiness. The contribution of this paper is a proposal for strengthening existing ESG ratings through standardization, regulation, and greater focus on GHG emissions. The proposal draws on elements of the corporate credit rating system and related financial regulations. The goal of the proposal is to establish a rating framework that would increase transparency and accountability regarding corporate GHG emissions and other impacts on the environment. Such a framework would clearly identify environmental leaders and laggards for investors, who could direct their capital accordingly. As a result, corporations would have incentive to adopt more sustainable business strategies and practices to earn favorable ratings and retain access to capital. There would likely be resistance to the proposed framework from fossil fuel producers, existing ESG rating providers, and possibly from the current U.S. Security and Exchange Commission.

The proposal has on its side, however, converging scientific, financial, and political trends, including: 1) the steady rise of global temperatures; 2) increasing demand by investors representing trillions of dollars in assets for more information about how corporations are managing climate risk; 3) reinvigorated climate action under the new U.S. administration. The proposed framework is intended to supplement other, more substantial contributions to global efforts to achieve Paris Agreement targets and prevent global warming from reaching crisis levels.