Corporate ESG assessments fail to capture actual deforestation exposure.

Abstract

Deforestation is a fundamental upstream risk to global sustainability, affecting all three pillars of credible Environmental, Social, and Governance (ESG) assessments, which are crucial sources of information facilitating sustainable investment decisions. However, the efficacy of major commercial ESG assessment tools in capturing corporate deforestation exposure remains unknown. We examine the relationship between corporate ESG ratings from five major ESG rating providers and two geospatially driven measures of company-level deforestation: forest loss surrounding corporate assets across sectors globally and supply-chain exposure to six forest-risk commodities in four tropical countries. Although deforestation is featured prominently in ESG methodologies, we fail to find evidence that ESG scores consistently penalize companies for deforestation. Conversely, ESG ratings respond more to media-based signals than to geospatially quantified deforestation. ESG analyses present apparent biases. Companies with deforestation exposure through soy, pork, and chicken supply chains receive higher ESG scores, whereas palm oil producers are more consistently penalized for deforestation exposure. Future integration of geospatial, ground-validated deforestation data and supply chain information into ESG assessment frameworks is essential for ESG-driven sustainable investing to effectively contribute to curbing deforestation.