The idea of rating companies’ environmental, social and governance performance is reaching a fever pitch, what with the world's largest institutional investors, pension funds and sovereign wealth funds paying attention.

Over the past year or so, a succession of fund managers and portfolio owners have ratcheted up the value paid to such heretofore marginal matters as susceptibility to extreme weather, anti-corruption policies, board member diversity and human rights policies. Things that used to be written off by most mainstream investors as "externalities" are seen as core to profitability.

Example: Last week, S&P Global Ratings announced that it has started to include ESG sections within corporate credit rating reports. The announcement coincided with recommendations of the United Nations Principles for Responsible Investment that credit rating agencies be more explicit about credit-relevant ESG risks and opportunities in rating reports.

ESG, it’s safe to say, has moved from the margins of liberalism to the middle of Wall Street.

But it’s not that simple, as investors are learning the hard way.

We’ve already established that the recent Chapter 11 bankruptcy filing by California utility giant PG&E well may be the first corporate climate casualty. The irony is stark, as my colleague Heather Clancy recently noted: "One of the true pioneers in the clean-energy transition could be one of the first corporate victims of climate change."

The recent Chapter 11 bankruptcy filing by California utility giant PG&E well may be the first corporate climate casualty.

But that’s only the beginning of the disconnect between sustainability and profitability. As longtime sustainability consultant Gib Hedstrom notes in a forthcoming article written for the National Association of Corporate Directors and previewed here, PG&E was a star of the ESG world. "PG&E seemingly had its ‘ESG house’ in order," Hedstrom writes.

To wit:

• Sustainalytics (the company providing data to Yahoo Finance) rated the company as an "outperformer" (in the 88th percentile on Environment and 82nd percentile on Governance).
• PG&E rated No. 2 among utilities and No. 54 overall in the 2018 Corporate Responsibility Magazine’s 100 Best Corporate Citizens (PDF).
• Newsweek Green Rankings listed PG&E No. 1 among electric and gas utilities and No. 4 overall among U.S. companies.
• The company had been named to the Dow Jones Sustainability North America Index eight times since 2008.

Moreover, Hedstrom notes, PG&E’s 187-page 2018 Corporate Responsibility and Sustainability Report seems to "check all the boxes," explicitly calling out the company’s mission, vision and values. "Board committees are in place; ESG materiality assessment has been done, ESG is incorporated in the company’s financial incentive plan and the organization has a dedicated Chief Sustainability Officer, along with an outside advisory group," he writes. "PG&E has a long history of ESG disclosure, bold goals to cut greenhouse gas emissions, and a record of early delivery on rigid California compliance standards (three years ahead of schedule). The list goes on."

Or consider a recent analysis by Four Twenty Seven, a market intelligence firm based in Berkeley, California, asked by Barron’s to assess which of the S&P 500 companies are most susceptible to extreme weather and climate change. The firm looked at 24 industry groups to see which phenomena were material to each industry and came up with a scoring system.

NextEra Energy, the world’s largest utility by market value, was ranked No. 3 in risk because 52 percent of its facilities are exposed to hurricanes.

PG&E was tied for No. 46 among the 500 companies, although it was hardly the riskiest utility. NextEra Energy, the world’s largest utility by market value, and a heavy investor in solar, wind and battery technology, was ranked No. 3 in risk because 52 percent of its facilities are exposed to hurricanes, especially a few dozen facilities along Florida’s Atlantic coast. Consolidated Edison, which has a quarter of its facilities exposed to sea-level rise, particularly around New York City, was ranked slightly less risky, at No. 6.

All of which suggests that the world of ESG ratings and assessment has a way to go before it truly can help investors make risked-based asset-allocation decisions. For example, it remains largely rooted in the realm of discouraging bad behaviors instead of encouraging good ones. That’s changing slightly, thanks in part to the rapid rise of climate-related financial disclosures. But that is still in its early days, as companies, particularly in the United States, are just now learning how to assess what might happen to their operations, supply chains and markets under different temperature-rise scenarios.

So, does PG&E’s downfall represent an object lesson in ESG’s limitations or underscore its importance or both?

I’m drawn to Door No. 3 — that the moment shows the kinds of existential threats that companies, and not just utilities operating in wildfire country, likely will be seeing with greater frequency in the coming years. And that we darn well better learn how to assess those risks much better than we currently do.

And that companies that check all the right boxes on environmental, social and governance issues may not be as protected from the wrath of nature — or investors — as they may think.