Don’t Unbundle ESG from Climate Change

By Tim Bovy

Integrating ESG with climate change is essential to address interconnected environmental and social risks effectively. Tim Bovy argues that enforceable frameworks like CSRD and double materiality strengthen corporate accountability, emphasizing the need for executive oversight to align sustainability performance with long-term business resilience and global climate mitigation goals.

Jeffrey Gordon, a Columbia Law School professor, has written that “we need to unbundle the mitigation of climate change risk from what is now called ‘ESG,’” claiming that “ESG diverts attention from the element that must be prioritized, the mitigation of climate change risk.” He is particularly critical of the EU’s Corporate Sustainability Due Diligence Directive (‘CSDDD’) which he notes, “to quote a law firm memo, ‘could require large companies to undertake due diligence on their own activities and that of their suppliers, and to identify and prevent, end or mitigate any actual or potential adverse impacts of their activities on human rights and on the environment.’”^[1]

There is a close link with climate change, not just from the aspect of greenhouse gases, but from issues related to inequality and human rights. 

He is equally critical of the EU’s Corporate Sustainability Reporting Directive (CSRD), “which requires so-called ‘impact disclosure’ of the effects of the company’s activity on people and the environment as well as financial disclosure pertaining to sustainability issues, so-called ‘double materiality.’”^[2] The two uses of “so-called” point to a high level of cynicism, the adjective generally being employed “to show that you think a word that is used to describe someone or something is not suitable or not correct. It often implies doubt or skepticism about the validity of the term being used.”^[3] This cynicism reveals the stark difference between the EU and America’s view of climate change enforcement via ESG compliance requirements.

Impact materiality, which is the inside-out half of double materiality, specifies the responsibility a company has for the impact of its operations on the environment and society. Consequently, there is a close link with climate change, not just from the aspect of greenhouse gases, but from issues related to inequality and human rights. 

Overlap between ESG and Climate Change

Climate Change is a core CSRD Reporting Requirement, which is considered the primary environmental topic. The threshold for omitting climate disclosures is higher than for any other area.  Companies must disclose how they manage climate-related risks, opportunities, and actions, including their policies, mitigation plans, energy consumption, and greenhouse gas (GHG) emissions across Scopes 1, 2, and 3.  “However, sustainability reporting under CSRD is much broader. The environmental standards extend beyond climate to include pollution (ESRS E2), water and marine resources (ESRS E3), biodiversity and ecosystems (ESRS E4), and resource use and circular economy (ESRS E5).”

We would argue that the overlap is even broader, extending to social issues related to equality and human rights, which have a profound impact on climate change.  Although, as the UN’s Principles for Responsible Investing points out, human rights “are the foundation of the ‘social’ pillar within the term ‘ESG’”, they also pertain to the environmental issue of climate change, since climate change has a “significant impact on human rights.”^[4] Chatham House has observed, “It is now widely accepted that the climate crisis is also a human rights crisis, perhaps the most consequential of all time.”^[5]

So, why is this wider view of climate change important? If we are going to develop mitigation strategies to manage it, we need to see it whole. Think of looking at a ball that you are holding in your hand. You are only seeing one limited aspect of it.  The rest of it is like the dark side of the moon. To see it whole, you must rotate it slowly.  This is what we must do with climate change, and why we must recognize its many facets. Otherwise, our view is so blinkered that we can never hope to mitigate its devastating impact across a broad range of complex and interconnected issues.

Which brings us to the significance of double materiality. By simply looking at how climate change impacts financial performance, businesses abdicate their responsibility to consider how their operations impact people and the environment, taking us back to Milton Friedman’s 1970 pronouncement that those who claim that business should have a “‘social conscience’” and [take] seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers…are—or would be if they or anyone else took them seriously— preaching pure and unadulterated socialism.”^[6]  Fortunately, the EU does take them seriously, which is why it has made CSRD mandatory.

Importance of ESG Enforcement to Climate Change

CSRD is also enforceable. It defines a company’s legal reporting obligations, while the European Sustainability Reporting Standards (ESRS) provides the specific standards and guidelines for fulfilling those obligations. Of the many ESG reporting frameworks, only the CSRD and ESRS are both mandatory and enforceable. For example, “When companies are found to have omitted key reporting information — or submitted non-compliant disclosures — they could face a range of penalties, including: 1) Financial penalties; 2) Subsidies’ suspension; and 3) Publication of non-conforming information.” In addition, “[i]n certain circumstances, companies could be held legally liable. For example, if businesses are found to be deliberately concealing relevant information from stakeholders, then those responsible, including company executives, could face criminal prosecution.”^[7] Here, we can detect echoes of Sarbanes-Oxley, following the Enron fraud, which made executives criminally liable by amending the US Federal Sentencing Guidelines for this purpose. 

Value of Establishing Executive Accountability

Under the CSRD, executive accountability means that company directors and executives are legally responsible for ensuring the accuracy, completeness, and credibility of sustainability disclosures in line with EU standards.

The sustainability information must be included in the management report (not separate), aligning it with financial reporting.

Company boards and management—including CEOs and CFOs—are explicitly responsible for the oversight and approval of sustainability reports. The sustainability information must be included in the management report (not separate), aligning it with financial reporting. The entire administrative, management, or supervisory body is liable under national laws for ensuring compliance with CSRD.

Under the CSRD, executives are no longer only accountable for financial performance, but also for sustainability performance. This marks a significant shift toward holistic corporate accountability, making sustainability reporting a matter of boardroom-level compliance and liability.

We shall be addressing this issue of executive accountability more fully in a subsequent article, comparing it with Sarbanes Oxley. Suffice it to say here that although CSRD is about non-financial (ESG) data integrity, it mandates that the company executives of the approximately 11,700 companies required to report in 2025 treat it with the same rigor as financial reporting.

Conclusion

We don’t need to unbundle ESG and climate change, we need to replicate the CSRD’s enforcement of climate change across the world. We need the boardroom-level accountability that it provides. We need its recognition of the interconnected factors, including human rights and inequality, that are inextricably linked to climate change.  Finally, we need to refrain from sneering at double materiality. We should understand it for what it is: an acknowledgement by responsible citizens and investors alike that many companies do harm.

About the Author

Tim Bovy has over 35 years of experience in designing and implementing various types of information and risk management systems for major law firms such as Clifford Chance; and for international accountancy firms such as Deloitte. He has also developed solutions for organisations such as BT, Imperial Tobacco, Rio Tinto, the Kuwaiti government, The Royal Household, and the US House of Representatives. Tim is an elected member of The Royal Institute of International Affairs, Chatham House, an Independent Think Tank based in Central London, and holds a BA degree, magna cum laude, from the University of Notre Dame, and MA and C.Phil degrees from the University of California, Davis.

References

^[1] Jefferey N. Gordon, “Unbundling Climate Change Risk from ESG,” Oxford Business Law Blog, 8 September 2023, available at https://blogs.law.ox.ac.uk/oblb/blog-post/2023/09/unbundling-climate-change-risk-esg

^[2] Please see Footnote 1 above.

^[3] See, for example, the Cambridge Dictionary available at https://dictionary.cambridge.org/dictionary/english/so-called

^[4] “An introduction to responsible investment: Human rights,” 9 January 2024, available at https://www.unpri.org/introductory-guides-to-responsible-investment/an-introduction-to-responsible-investment-human-rights/12026.article#:~:text=Human%20rights%20are%20the%20foundation,significant%20impact%20on%20human%20rights

^[5] Chatham House Briefing Paper, “Renewing human rights: Inequality, climate and technology at the heart of the human rights agenda,” September 2023, available at https://www.chathamhouse.org/sites/default/files/2023-09/2023-09-14-renewing-human-rights-griffiths.pdf

^[6] Milton Friedman, “A Friedman doctrine‐-The Social Responsibility of Business Is to Increase Its Profits,” The New York Times, Sept. 13, 1970 available at https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html

^[7] How the EU’s CSRD regulation will impact European businesses’ sustainability reporting, Carbon Chain, available at https://www.carbonchain.com/carbon-reporting/eu-csrd#:~:text=For%20example%2C%20if%20businesses%20are,avoided%20due%20to%20the%20breach.