Managing Environmental, Social, and Governance (ESG) risks and opportunities has become increasingly important for companies in every industry, but in order to calculate ESG liability, a company must first know their ESG score. In this article, you will learn how ESG lead scoring works.
The focus of today's investors has evolved beyond the bottom line to include understanding a company's value and long-term sustainability. Environmental, Social, and Governance (ESG) is no longer a trend, but a necessity for businesses and it will continue to be at the forefront of corporate structures. As businesses start or expand their ESG implementation, investors need ways to determine how they perform in terms of ESG. This is where ESG scores come in. Here’s everything you need to know about ESG scores, how they’re calculated, and what is considered a ‘good’ and ‘bad’ ESG score.
ESG Scores Explained
Simply explained, an ESG score is a rating that evaluates how sustainably a company is conducting business. ESG scores are typically based on two factors: risk/opportunity exposure and performance.
By evaluating the score, investors can assess how the company treats its employees, how its board makes decisions, and whether environmental consciousness is a priority. In October last year, Investors Business Daily (IBD), a leading financial news and research organisation, announced the results of its third annual Best ESG Companies list.
Who calculates ESG scores?
There are many research and rating agencies that specialise in ESG scoring. These agencies use their own methods and formulas to measure how well ESG risks and opportunities are integrated into an organisation's strategy and operations.
ESG rating agencies gather data from multiple sources, such as the company's publication, Government data bank, media, NGOs or other stakeholders.
During the rating process, the agencies will use a specific mechanism to adjust the company's score based on its industry. Investors can compare a company's ESG score with that of industry peers and companies from other industries.
Some of the most prominent companies that provide ESG scores are:
- Bloomberg ESG Data Services
- Dow Jones Sustainability Index
- MSCI ESG Research
- S&P Global
- Moody’s Investors Service
What do ESG scores measure?
A company's ESG rating measures its exposure to long-term environmental, social, and governance risks. These risks (such as energy efficiency, worker safety, and board independence) affect the bottom line. Take a look at the breakdown of each factor below.
Environmental issues can include factors such as
- Carbon emissions
- Climate change vulnerability
- Water sourcing
- Biodiversity and land use
- Toxic emissions and waste
- Packaging material and waste
- Electronic waste
Social scores include issues such as
- Labour management
- Worker safety training
- Supply chain labour standards
- Product safety and quality
- Consumer financial protection
Governance issues can include:
- Composition of the board in terms of diversity and independence
- Executive compensation
- Accounting practices
- Business ethics
- Tax transparency
ESG rating companies also consider the opportunities within different ESG categories. For instance, environmental opportunities can include clean technology, green building, and renewable energy while some social opportunities can be better access to communication, finance, or healthcare.
Ultimately, these risks and opportunities provide investors with a comprehensive picture of an organisation's environmental footprint, its commitment to the community, and how it invests in its sustainability initiatives.
ESG ratings help investors decide on what businesses and funds to potentially add to their portfolios. Investors prefer companies with better overall ESG scores because they typically have fewer liabilities, making it easier to acquire capital and hire top talent. Companies with higher ESG ratings also have successful stakeholder relationships and a brand reputation. All of these factors have an impact on the profitability and bottom line of a business.
If a company's ESG score is high, investors may consider investing in it either because its values align with their own or because it is adequately protected from future risks. Investors may be turned off by companies with low ESG scores.
Depending on the rating agency, some may use a letter-based scoring system, while others use a number-based scoring system.
The number-based method gives a score that ranges from 0-100, with 70 and above considered a ‘good’ ESG rating and 50 and below considered a ‘bad’ rating. The letter-based scoring system assigns a letter grade to companies, with CCC being the worst and AAA being the best.
Getting started with ESG scoring
To achieve a good ESG score, your company needs to establish a robust ESG governance structure. This structure will ensure sufficient and effective ESG management policies, internal controls, and that implementation measures are in place. Before submitting ESG data to rating agencies, you should review it to ensure it clearly, accurately and effectively addresses the rating criteria. A good place to start would be by setting ESG targets, capturing key indicators and outcomes relevant to your industry, and ensuring that this data is transparent and reliable. Infogrid provides some excellent insights into how you can achieve a good ESG score.
The Future of ESG
Businesses were forced to evolve as the world around them changed and presented new risks and opportunities during the COVID-19 pandemic. As the world recovers from the effects of the pandemic, there is an increasing demand for solutions that have the potential to drive significant change. Investors are not only demanding that companies adopt resilient ESG practices, but they are also looking for concrete answers about how companies are doing it.
Today’s investors are passionate about driving change and making a difference. According to a poll conducted by Kiplinger, more than half of investors would be willing to sacrifice some performance on their investments to achieve an ESG goal. As more data and newer technologies become available, companies should develop stronger frameworks for achieving their ESG goals.
How we can help
Your waste management strategy, along with the fact that you are reducing landfill waste, adds significant value to your ESG scorecard.
Having a clear understanding of this enables us to help you in the following ways:
- Assist in developing your waste management strategy
- Consistently keep reducing your waste that goes to landfill (our profit model rewards us for achieving this)
- Help you achieve Zero Waste to landfill if this is your ultimate goal
- Present you with auditable traceable data in almost real-time.
Developing a solid waste management strategy can be a challenge.
Speak to one of our experts today and start your journey to responsible waste management (and high ESG ratings).
