ESG refers to the environmental, social, and governance practices of an organization. Investors and stakeholders now use these factors to understand how companies operate and manage risk.
What a company does with ESG can significantly affect how others view it. For example, want to see ESG factors in an investment analysis. A third will reject companies that conflict with their values.
For that reason, businesses that want to succeed in the modern marketplace must show where they stand on ESG. Understanding the different ways to measure these factors and aiming for the ideal ratings and metrics can help companies reach this goal.
What Is ESG, and What Is the ESG Meaning in the Modern Marketplace?
Investors look at a business’s financial, environmental, and social impact: the “triple bottom line.” Businesses can address these elements by improving the three facets of ESG.
The environmental component of ESG deals with how a company is affecting the environment. Key elements include steps to reduce waste, conserve energy, and use sustainable materials. These eco-friendly initiatives often lead to efficiency improvements and cost savings in addition to attracting investors.
A company’s impact on society is the social part of the ESG meaning. These practices involve how an organization deals with its local community and the world as a whole. Investors review a business’s labor practices, attention to human rights, community engagement, diversity, equity, and product safety.
Investors also consider how a company’s leadership operates. Good governance ensures a business is ethical and sustainable. When a business is well-run, stakeholders view it as less risky and having excellent long-term value.
Making the right adjustments in these areas improves a company’s reputation. High esteem among the public reassures investors that a business will keep its social license to operate and not fall into disfavor. Consequently, attention to ESG mitigates risks and increases a company’s value.
Which Are Some of the Top ESG Rating Agencies?
Over 140 organizations provide ESG ratings. The abundance of systems and groups can quickly overwhelm anyone. Regardless of which methodology a company settles on, all should be aware of the top rating agencies and how they operate.
Morgan Stanley Capital International
An MSCI ESG rating uses a seven-point letter rating scale to grade a company on ESG. This methodology focuses on three components:
- Key industry-specific issues that affect a company’s long-term value
- A company’s exposure to the key issues
- The company’s ability to navigate its ESG opportunities and risks
In MSCI, AAA is the best grade, and CCC is the worst.
Global Real Estate Sustainability Benchmark
GRESB ESG ratings focus on real estate firms and funds. The organization collects and validates data from participating companies to generate ESG scores.
The GRESB scoring document assesses a real estate group’s:
- Tenants and community
- Energy use
- Materials use
- Stakeholder engagement
The GRESB score is on a 100-point scale. That score then provides the basis for a rating from one to five stars. Only 20% of entities qualify for a five-star rating.
Annual updates allow an organization to see how it performs against others. This consistent review motivates companies to maintain socially responsible and sustainable practices.
The CDP was formerly the Carbon Disclosure Project. As such, the group focuses mainly on the environmental aspect of ESG and disclosure. The CDP score is a letter grade of A, B, C, D, or F.
This system aligns with other standards, such as the Taskforce for Climate-Related Financial Disclosures. Naturally, many companies use the CDP along with other scores that address the social and governance components of ESG.
Investors are familiar with the S&P 500 as a stock market index. S&P Global also calculates ESG scores through its Corporate Sustainability Assessment. It gathers and verifies information from the CSA questionnaire and information available in the public domain.
S&P categorizes companies as participating and non-participating. Consequently, even organizations that do not complete a CSA form can receive a score.
Other Agencies To Consider
A few other organizations to know include:
- Institutional Shareholder Services: A 10-point scoring model that reviews over 200 factors for institutional investors
- FTSE Russell: A tool that measures securities’ ESG performance, relying only on publicly reported data
- Sustainability Accounting Standards Board: A set of internationally recognized accounting ESG standards that companies and agencies use to create scores
- Sustainalytics: A measure to assess a company’s industry-specific ESG risk, where zero is the best score and over 40 is severe
- Moody’s: A 100-point scoring framework to help companies manage stakeholder relationships
Companies have no shortage of options for choosing a standardized ESG rating. Determining the right model often requires the help of an expert that understands a business’s model, industry, and needs.
How Does a Company Create Custom ESG Metrics?
External ESG ratings and standards are critical for displaying sustainable and social progress. However, a company also needs a customized approach. Creating custom ESG metrics is similar to the way a business must go beyond a standard template for its business plan or budget. Tailored strategies are essential.
Metrics To Include in Custom Reporting
While developing metrics, companies should be sure to address vital aspects of ESG. For environmental impact, the carbon footprint, emissions, and recycling efforts are essential. The highly scientific nature of these and related areas almost always demands the assistance of an expert.
For social matters, a business can consider labor standards, data protection, and the company’s diversity in hiring and partnerships. Governance metrics can touch on shareholder rights, board composition, and a transparent conflict of interest policy. Engaging shareholders and employees is vital to isolating critical social and governance issues.
Challenges To Creating Custom Metrics
A business may find it a challenge to get all stakeholders and team members on board. The effort can be very time-consuming. Often, the assistance of an industry expert or outside party with strong data can provide an objective perspective that gains buy-in.
Like other investments, a return on ESG efforts comes from patience and consistency. Businesses must fight the common tendency to start strong but then lose focus. Executives must create replicable processes that simplify data collection and reporting to stay on course.
A final concern is transparency. Custom metrics can raise questions about their application. Companies must ensure that stakeholders can trust the results and use verifiable strategies to avoid accusations of greenwashing.
Benefits of Adopting Custom Metrics
Customized metrics best serve existing investors and stakeholders. These parties can quickly review the specific issues that concern them most.
Also, corporate leadership can combine data in a more comprehensible format for stakeholders. Another benefit of using custom ESG metrics is the ability to factor in positive things the company does that other standards may not give as much attention to.
Starting from scratch will be a challenge, but the assistance of experts and the right software will ease the transition.
How Does an Organization Coordinate Impact Measurement With ESG Reporting?
Investors will have a keen interest in how ESG affects a company’s financial return. Many have an impact measurement methodology to ensure that efforts and capital go toward areas of the greatest significance.
Companies should start by discerning the correct mix of standard and custom ESG metrics to report. A company must then:
- Identify the relevant factors with stakeholders
- Collect and analyze the necessary data
- Set appropriate targets
- Implement an ESG strategy
- Follow a regular schedule for reporting progress
A company needs to be sure to tell its story and share its ESG success to reap the benefits. ESG activity should be a consistent element of marketing, public relations, and company reports.
How Can a Team Benefit From Integrating ESG Into Its Business Strategy?
To succeed with ESG, careful planning and open discussions are essential. Leadership teams would likely do best to dedicate an initial meeting to addressing ESG. Once the strategy is in place, the company can bring ESG into regular operations.
Larger companies usually benefit from hiring someone for a dedicated role to oversee this area. Regardless of a business’s size, outside input helps a company avoid critical mistakes and get the highest ROI on ESG.
What is ESG able to do for different industries? A few examples show outstanding benefits:
- Banking and finance companies can focus on socially responsible actions and avoid the scandals that have rocked other institutions. Green lending attracts conscientious investors and incentivizes good behavior.
- In the healthcare industry, ESG integration has helped institutions improve the quality of service, reduce costs, and minimize regulatory and legal risks. These efforts lead to a boost in reputation and productive investments and partnerships.
- Real estate and property firms see increasing property values, additional tax credits, better tenants, and higher rates on rent. Better care for properties means they last longer and provide even more value.
Businesses stand to gain immensely from bringing ESG into decision-making and strategy.
Who Can Help You Boost Your ESG Performance?
Your company’s ESG performance shows how you meet criteria that improve the world and make your organization more risk-averse. Attentive investors and clients will reward your efforts with their dollars. Also, the adjustments will make your business more efficient and save money.
Instead of struggling on your own to make sense of each ESG framework and metric, get practical assistance. Talk to ESG Property Consultants. We’ll help you settle on the best ways to measure and market your ESG performance.