There has been a renewed interest in environmental, social, and governance (ESG) metrics among the traditional finance communities. The surge of interest, however, has created ambiguity about the right metrics and reporting tools for reflecting ESG investments and outcomes. To help provide companies with structure around ESG and sustainability reporting, Atmos – a Nashville-based technology startup – has recently launched and pioneered a novel, transparent, and cost-effective tool as an alternative to hiring traditional consultants.
Ambiguity about and interest in ESG metrics
Interest in ESG dates back to earlier discussions around corporate social responsibility (CSR) years ago. But the renewed focus on ESG reflects an interest in broader metrics with nearly 81% of the Russell 1000 companies publishing a sustainability report in 2021 – a 70% increase, relative to 2020, according to a 2022 study by the Governance & Accountability Institute.
“ESG began as a marketing buzzword for many investment firms, but has since become an integral part of investment strategy. Now firms must revisit the marketing, to defend against those attacking their investment strategies,” said Dan Primack, a reporter for Axos.
Further, leading investment management companies have argued that firms need to distinguish themselves with respect to their focus on ESG issues. “Every company and every industry will be transformed by the transition to a net zero world,” said Larry Fink, CEO of BlackRock.
However, ESG ratings vary substantially for any given company, according to Barclays. Differences in measurement contribute to 56% of the discrepancies in ratings across agencies and differences in scope contribute 38%, according to recent research by professors Florian Berg, Julien Kolbel, and Roberto Rigobon in the Review of Finance. In other words, the six largest rating agencies rarely agree with each other on a company’s ESG rating because of differences in what inputs and indicators they look at and use when forming an overall index.
But the solution, they argue, is not to default to a fully standardized approach for rating. “Taking a standardized approach could be susceptible to manipulation… once companies learn the factors that constitute high versus low performance, they could game the system, but relying on trained human experts is likely to prove more resilient,” said Berg. Even though the specific metrics that take root may evolve over time, firms across the board are increasingly paying attention to how the measures are constructed and reported upon.
In addition, an increasing number of investors are still asking firms to fill out due diligence questionnaires (DDQs) that contain questions relating to ESG, according to the Principles for Responsible Investment, a coalition of signatories. Having a plan, even if the specifics are not fully prepared, is becoming essential for firms for not only investors, but also regulators. Some have begun comparing new regulatory requirements around ESG with the Sarbanes-Oxley Act (SOX) of 2002, which tend to cost firms over $2 million annually, according to Auditboard. The US Securities and Exchange Commission estimates annual compliance costs for ESG range between $420,000 and $530,000 for individual companies.
The Atmos approach
Atmos was founded in 2022 by Max Mona and Adam Jace to help mid and small-sized firms comply with a growing interest by regulators and investors to understand firms’ ESG strategy.
“We started Atmos after experiencing difficulties with ESG in the early stages of our finance careers. Companies are being forced to respond to vendor & investor inquiries and they do not know where to start. Without guidance, many organizations would look toward large consulting firms to help navigate their growing responsibility. From day one, our mission has been to eliminate the barriers to entry for doing ESG well by offering a market-ready solution that automates the typical ESG consulting engagement,” said Max Mona.
While large firms generally have the resources and staff to put together formal ESG reports that assess the strengths and weaknesses of their activities, smaller firms may not know where or how to start, particularly given the ambiguity about what metrics matter and when. Atmos helps firms overcome this barrier by creating a platform with customized ESG reporting questions that are based on the firm’s industry, sector, and size, transforming their answers into generated reports, such as their Materiality Assessment & ESG Metrics scorecards. These assessments provide a clear framework for how to prioritize material ESG issues among the hundreds of ESG factors, which can help firms save in compliance costs.
Doing so helps firms focus only on the metrics that matter given the growth stage and sector that they are in. Personalization allows firms to create and share an ESG strategy without getting overwhelmed by metrics that are less germane or not informative given their focus. “The days of seeing ESG efforts as just a check-the-box, risk-mitigation exercise are ending. More and more, limited partners view ESG factors as an additive to investment performance. Furthermore, a lack of strategy for thoughtfully managing ESG considerations can cause proposed deals to face obstacles—or cancellation,” according to a 2022 study by Bain.
Atmos has also created tools for venture and private equity funds that offer fund-level scorecards, allowing funds to compare firm performance against industry standards, such as ILPA and PRI, and portfolio ESG oversight, which benchmarks fund portfolio firm ESG data.
“At S&P, we saw CFOs emerging as the first point of contact for any ESG-related questions from investors, clients, vendors, and employees. Those clients needed to build up resources and reporting standards to help alleviate that burden. ESG also allowed those CFOs or investor relations executives who embrace these new ESG questions to gain valuable board visibility on sustainability initiatives,” said Michael Hutto, head of growth and formerly head of global sales at S&P Global.
Even though the future is uncertain over the specific ESG metrics that take root, firms need tools to facilitate compliance with regulators and satisfy due diligence questions from investors. Atmos provides firms with one such tool that streamlines the reporting process and focuses on the metrics that matter most for their stage and sector.
