Key takeaway

This paper highlights how ESG integration presents deeper challenges than simply requiring standardised ESG disclosures. It indicates that there are fundamental discontinuities between financial and ESG data. Investors should approach ESG data from a more interpretive perspective and consider ESG accounting inscriptions as ‘resonance chambers.’

Problem identification

The primary impediments identified by the study for incorporating ESG issues are their lack of comparability within and between organisations, the lack of reporting standards, and the paucity of quantified information. However, this study points to deeper discontinuities between financial accounting and ESG data, questioning both the feasibility and adequacy of integrating ESG issues into financial analysis.

Review of relevant literature

The authors review the literature that views financial and ESG accounting as ‘inscriptions,’ both ‘inherently incomplete’ and ‘performative.’ They argue that current regulatory efforts place faith in the development of common ESG disclosure standards to resolve ‘impediments’ to ESG integration, but our case study points to more fundamental discontinuities.

Case study of ESG integration

The case study investigated an early attempt at ESG ‘integration’ in an equity investment team. Through this investigation, the report identifies the following challenges in integrating ESG issues into financial analysis:

• Ambiguity of value relevance: ESG issues have the ambiguity of their potential relevance to financial analysis.
• Quantification and aggregation: Quantification and aggregation of ESG data can obscure its significance.
• Difficulty in placing a monetary value on ESG data: There is difficulty in attaching a value to ESG data, whether in aggregate or disaggregated form.
• Spatial boundary limitations: Financial accounting functions within the ‘entity’s’ spatial boundary, which limits consideration of ESG issues.
• Short-term financial projections: Financial accounting limits consideration of ESG issues to the short term.

Implications and conclusions

The authors conclude that while ESG integration is an increasingly attractive investment to investors, the UNPRI’s limiting of ESG risks to potentially ‘financially material’ risks may create a false sense of security for investors and their clients. This study indicates that there are fundamental discontinuities between financial accounting and ESG data. Therefore, the challenges of ESG integration require more than standardised ESG disclosures; instead, they require a deeper understanding of the relationships and values that financial and ESG accounting represent.

Recommended actions

The study suggests that investors should approach ESG data from a more interpretive perspective and rely less on ESG data providers to the implementation of ESG integration. Rather than focusing on ESG data quantification and aggregation, investors should consider accounting inscriptions as ‘resonance chambers’ – sites where “values, narratives, and social worlds intersect and interact.”