In today’s consistently evolving business landscape, investors look far beyond a company’s financial statements to understand its worth better. As a result, evaluating the ESG score can significantly impact investment decisions based on the company’s opportunities and risks. What do you know about ESG and how it affects your company? This guide will break down the meaning of ESG, how to calculate it, and what you can learn about your business from it.
What Is an ESG Score?
ESG metrics objectively evaluate and measure a security, fund, person, or company’s performance regarding non-financial issues that can affect the ability to grow. ESG is not part of mandatory financial reports. Still, many companies now choose to disclose ESG factors in their annual financial information or a separate sustainability report.
The criteria for calculating your score can vary based on your industry and the issues currently affecting that industry. Investors use ESG to screen a company for social consciousness, and business owners can use their scores to make better investment decisions for the company.
Personal ESG Scoring
Just as an investor will use a personal credit score before loaning money to an individual, companies can use individual ESG scoring to determine whether an individual displays dedication to corporate sustainability. For example, a high personal score may indicate the person is responsible enough to take on a position requiring a heavy responsibility load.
Using personal ESG scoring as part of the interview process has several benefits:
- The additional scrutiny when onboarding new talent translates to a demonstration of the company’s commitment to sustainability.
- People with high ESG personal scores are typically more innovative and committed to company success.
- Adopting personal ESG screening practices can make your company competitive in the industry.
- Over time, ESG scoring can strengthen the brand and please the stakeholder.
An ESG personal score allows the company to understand its employees’ values better. As a result, you can weed out people who may appear financially wise but do not ascribe to the company’s ideals. This is especially important when seeking investors or partners.
ESG Scoring for Companies
Accessing ESG risks is beneficial for investors and businesses. The company can utilize its score to measure exposure to short and long-term risks that can affect value. With consistent monitoring and the assistance of ESG rating agencies with experience in your industry, companies can better manage their brand reputation and create long-term solutions to existing or potential issues.
What Does ESG Stand for?
Environmental, social, and governance are the components that form the ESG score meaning. Sometimes the factors can interlink, making it challenging to classify an issue as one of the three. Consider the vital elements of each and how your business addresses them.
Your company’s sustainability efforts concern its part in conserving the environment and the natural world. This includes the following topics:
- Climate change and carbon emissions
- Waste management and energy efficiency
- Contributions to air and water pollution
- Deforestation and water scarcity
How well does your company comply with environmental regulations? Energy efficiency is arguably one of the most important factors to consider. Investors and consumers want to see a commitment to reducing emissions and a plan for how you intend to do it.
Social issues refer to how your company considers people and relationships. What are your policies regarding customer satisfaction? How do you manage data protection and mitigate breaches? Other elements of the social component of your ESG score include:
- Employee engagement
- Labor standards
- Human rights issues
- Community relations
Do you have DEI managers to address diversity and inclusivity issues in the company? Your social score can be profoundly impacted by your efforts to provide equal rights and opportunities for workers of all ages, genders, physical abilities, religious beliefs, ethnicities, and races.
Corporate governance refers to the standards used to run your company. How did you compose your board of directors? Do you participate in lobbying or make political contributions from corporate funds? Other factors relating to how you govern the company include:
- Compensation for executives
- Involvement in whistleblowing
- Participation in bribery or any other clear form of corruption
- Your audit committee structure
Governance standards help uphold ethical practices and ensure transparency in shareholder accountability. For example, how a company establishes governance can directly impact its pursuance of diversity, inclusion, and integrity.
How Is the ESG Score Calculated?
Analysts can use algorithms to take reliable ESG metrics like board election standards, annual carbon emissions, and diversity among executives and turn them into scores they merge to create a single primary rating. For example, an analyst may take hundreds of data pieces and assign a score to each based on the data provided.
Issues with the potential to impact the company within two years have more weight and are a greater risk than those likely to produce an impact within five or more years. Once every ESG risk has a weight percentage, investors can compare companies to peers within the industry to create a final rating.
ESG data can come from many sources, including business disclosures, governmental databases, media reports, securities filings, and academic research. In addition, most rating providers consider voluntary disclosure through specific frameworks, such as the UN Sustainable Development Goals and Global Reporting Initiative, a significant and credible source.
According to global standards set by the London Stock Exchange, there are characteristics of data that every company should consider when gathering ESG data. Investment-grade data should:
- Provide an objective view, even if it is unfavorable information for the company
- Be a product of rigorous data collection systems to ensure accuracy
- Align with the annual reporting cycle and have external assurance
- Meet the standards of the company’s business ownership model
- Be consistent with global standards to make it comparable to other company’s reports
Credibility is critical for ESG data. Meeting these standards shows stakeholders a commitment to the values that ESG represents.
What Is a Good ESG Score?
The scale for an ESG rating is 1-100, and a good score lands between 70 and 100. Companies with a score below or close to 70 can take action to improve their ESG performance.
Improving your score
There is no universal way to improve ESG metrics, and companies needing help should consider hiring a skilled ESG consultant to help develop an effective strategy. The strategy must be specific to the company and industry and reflect the factors that require the most attention. However, some common tactics for ESG performance improvement include:
- Identifying material topics. Managing ESG risk requires focusing on the most material issues for your industry and sector. Relevance is important to stakeholders and potential investors.
- Make ESG a firm part of your business strategy. A common mistake is addressing sustainability as an afterthought when it should be integral to the overall business strategy. Investors want to know how your business responds to economic trends on a macro level and how you position yourself for long-term success.
- Consider communication channels. How you report ESG information can impact your score. For example, if you include it in the annual business report, it may have less depth than in a standalone statement.
- Align with regulatory disclosure frameworks. Using global standards for ESG disclosure helps the company maintain ESG data in a comparable and reliable way. In addition, investors and stakeholders will appreciate the effort to make their jobs easier.
- Understand your ESG score. You need a strategy for managing your ESG performance that allows you to focus on improving it and communicating the information you gather more efficiently.
Remember to strive for investment-grade data when evaluating your company’s social and governance ESG positions, and be honest about your environmental impact. A truthful assessment can be a valuable asset in the company’s future.
Why Do ESG Scores Matter?
The world faces complex and urgent environmental and social changes daily. As the stakes get higher, companies need a value-led approach to sustainability, and everyone, from consumers to stakeholders, considers it their business whether you practice sustainability or not. If you care about the environment, social equality, and business transparency, your personal ESG rating matters to you because it is a means to show potential employers whether your values align. If you are a company executive or work among asset managers, managing ESG risk, ESG information is critical to your job.
Who Can Help You Execute Your ESG Score Strategy?
Experienced ESG investment consultants are knowledgeable and passionate about helping people and companies raise their ESG rankings and ratings. An advisor will evaluate your strategy, fill in the gaps where necessary, and provide a comprehensive program designed to meet your needs and proactively address your specific interests. To better understand what an ESG score is and what you can do to improve it, contact ESG Property Consultants to speak with an expert today.