Three-quarters of S&P 500 companies now tie a portion of their CEO’s pay to environmental, social and governance (ESG) metrics. They typically include carbon emissions, workforce diversity and worker safety, among others.

The justification is straightforward: if shareholders want corporations to take climate change and social responsibility seriously, firms should pay their leaders for achievements on these dimensions. This practice is encouraged by boards and large institutional investors.

Read more: ESG bonuses are on the rise: Are they improving sustainability or just increasing executive wealth?

Regulators are now trying to standardize the underlying metrics so investors can compare firms on a common basis. The European Union has gone the furthest by directly regulating ESG rating providers.

In 2024, the Canadian Sustainability Standards Board released its sustainability disclosure standards aligned with two global standards issued in 2023 by the International Sustainability Standards Board. Around 40 jurisdictions have now adopted those standards or taken formal steps toward doing so.

Why the push for standardization?

One persistent problem concerns how ESG performance should be measured in the first place. Today, major rating providers — including MSCI, Sustainalytics, S&P Global and Bloomberg — rate the same firms very differently, even when assessing the same dimension of performance.

One influential paper found that the average correlation between major ESG........

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