Understanding ESG Scores and Ratings

As businesses look towards recovery from the COVID-19 pandemic in the months and years to come, many boards rely on their ESG score as a key differentiator. And while boards have come to expect demands for transparency from investors, now they face similar expectations from customers and employees, who are increasingly making choices based on a company’s position on the most pressing environmental and social issues of the day.

What Is an ESG Score?

An ESG score is a numerical representation of a company’s performance on a wide range of environmental, social, and governance issues. Several agencies and organisations calculate ESG scores, each using different methodologies and ranking schemes: some use numerical scales, while others assign letter grades.

How Are ESG Scores and Ratings Calculated?

While different reporting agencies have different scales and ratings, there is also a degree of industry specialization among some agencies. Certain areas will be weighted more heavily based on industry. For example, a consumer products manufacturer might see higher benefit from its support for causes relating to women or children. In comparison, an automotive manufacturer might see more benefit from policies that reduce carbon emissions.

Companies must build ESG scores on data from a wide range of sources. This should encompass more than company-published reports: it must also include print, broadcast and online news sources; regulatory disclosures; even social media posts and blog posts.

In every case, however, ESG scores are calculated based on the available information to the agency tabulating the results. For this reason, it is essential to note that ESG scores are as much about perception as they are about reality. A company with robust, equitable hiring policies or that ensures all its partners align with its environmental standards may not see these initiatives reflected in its ESG scores if there is no public knowledge of them. When it comes to ESG scores, doing good is not enough. Companies must be seen to be doing good.

What Is a Good ESG Score?

Because different agencies use different formulas and approaches in scoring ESG efforts, companies should avoid making comparisons across different ranking scales.

From an investor perspective, the best ESG scores come from agencies and firms that don’t just look at a company’s past but also try to predict its future. These ESG scores are effective because they include the analysis that explains why a particular score was assigned. On that basis, investors have the information they need to make informed decisions.

What Are the Benefits of a Good ESG Rating?

Companies with a good ESG score often see significant benefits. And just as sustainable investment funds have recently outperformed conventional funds, companies with a good ESG score can also expect to see significant benefits. There is considerable evidence that investors care about ESG performance and that interest is reflected in increased stock prices and the growth of long-term shareholder value.

Beyond this immediate impact, KPMG’s research also suggests that ESG performance has additional, longer-term benefits. The effort companies put into changing and adapting their business models has a knock-on effect, for example, providing a buffer against disruption.

Those same efforts tend to encourage innovative thinking that leads to future growth and prosperity. And concerning environmental change, in particular, investment in renewable energy today will limit the future impact of financial risks due to climate change.

How Can ESG Software Help?

With access to accurate, up-to-date ESG information, boards and leaders can make decisions that will set companies on a more confident path. Diligent’s ESG Solutions includes robust libraries of standards and regulatory obligations that let organisations measure their ESG progress. And with access to industry benchmarks and analysis, boards can track their performance against their peers and identify areas where improvement is needed. Diligent’s ESG Solutions also track and monitor tens of thousands of data sources for ESG news and stakeholder sentiment, and deliver this to boards in a customizable, personalized dashboard.

As boards look ahead to the future, it is critical that they embrace the spirit inherent in ESG: to act in ways that help the planet, to build up communities, and to ensure that their company’s impact is only positive. Understanding their organisation’s ESG score is an essential first step towards implementing meaningful change.