Sustainability metrics for companies will only continue to grow in importance in the coming years, especially as consumers demand them from companies. And ESG scoring continues to grow in its popularity as a way to account for sustainability (and measure it) in a quantifiable manner.
So if you’ve been wondering what is an ESG score and why it matters, we’ll cover everything you need to know. Plus, we’ll provide some takeaways on how you can proactively put steps in place to improve yours.
ESG Components: What It Is & What It Measures
An ESG scores a measurement that rates your business’ impact on social or environmental issues from a long-term perspective. An ESG assessment will typically provide a measurable score in 3 key areas:
1. Environmental: What’s your company’s effect on the natural world and its resources?
This includes criteria related to climate change, carbon emissions, deforestation, waste management, water scarcity, air and water pollution, biodiversity, packaging, and materials waste, etc.
2. Social: What’s your company’s effect on people and relationships with groups inside and outside the organization?
This includes criteria related to how labor is managed, health and safety issues, worker training, product safety, chemical safety, product quality, consumer financial protection, data security, user privacy, stakeholder oppositions, access to benefits, etc.
3. Governance: What’s in place in regard to how your company is being managed, from financials to executives and overall transparency around operations?
This includes criteria related to board composition (its diversity and independence), executive team compensation, accounting practices, ownership, tax transparency, business ethics, etc.
The idea of ESG issues started gaining traction largely around 2006, when they were referenced in a UN report. From there, the idea of sustainability rating for companies has only gained momentum. Next, we’ll take a look at how ESG assessments and evaluations are being created to try to measure these three ESG components.
How Is An ESG Score Calculated?
Wondering how ESG ratings work, not that you understand what they’re assessing? Currently, there are several different established frameworks being used to determine how an ESG score is calculated. At Centri, here are the top five most credible ones we’ve seen companies utilize.
- SASB Standards
- GRI Standards
- TCDF (Task Force on Climate-Related Financial Disclosures)
- IIRC (International Integrated Reporting Council)
- CDSB (Climate Disclosure Standards Board)
At the moment, there is no authoritative or unified set of standards that can be used to measure across all industries. But the ones we’ve listed are well-established, credible frameworks that have been in use by organizations for a handful of years.
The ESG assessment framework you choose will depend on your specific industry and which one works best with your operating model. That’s why our team put together this helpful guide on ESG measurement tools. In it, you’ll see a chart breakdown of the five frameworks and some more detail on when and where they’re commonly being used.
Another key factor aside from what framework you use is who determines your ESG scores. You’ll want to make sure you work with a third-party organization that’s reliable and objective to give you a fair and accurate assessment process.
ESG Risk Score: What’s A Good Vs. Bad Score?
Your final ESG risk score will look different based on the model used and the calculations it includes.
Some frameworks will provide a numerical range between 0-100. (In that instance, anything above a 70 is considered good.) Other methods will provide letter scoring, with AAA being the best and CCC the worst.
Remember, the most important factor to ensure you get a truly accurate score is to provide accurate and clean data during the assessment process. The quality of what you input will determine the reliability of your ESG score.
Why ESG Ratings Are Important
There are several reasons why ESG evaluation is gaining momentum in the business community. But below are the top 3 rising reasons our consultants have seen it increase in value.
1. Experts foresee that ESG disclosure regulations will be passed in the future.
While it isn’t mandated, it’s a growing practice that boards and management teams need to consider. In March 2022 the US SEC proposed climate disclosure requirements.
This shows that ESG is becoming an important part of the SEC’s conversation and the possibility that it could become mandated down the road. And if it is, that could help standardize ESG scoring and make navigating the assessment process easier for businesses.
2. A good score can influence investors to provide capital for your company.
Any investor wants to know the risks of working with you, and increasingly more investors are looking for ESG data. It gives them an objective way to assess sustainability factors that affect a company’s performance but were not previously represented in the financials and data provided by companies.
A good score can ultimately show that your business is strategic, forward-thinking, and capable of holding its value in the long run. And these are all factors that will certainly attract an investor.
3. It can strengthen your business as ESG issues grow in importance culturally.
From regulatory bodies to consumers, many factors that fall into ESG are spurred by conversations happening within society at large. That’s why it’s important to invest in your company infrastructure to address ESG-related issues and improve your weak areas.
You may find it can give you a competitive edge, especially if in the future it becomes mandated. (Since you won’t be late to implement.) Plus, some studies looking at public companies have even shown that ESG improvements can affect stock prices positively.
And regardless of your company structure (private or public), it could also help you build loyalty among consumers or attract employees. The latter is something that shouldn’t be overlooked in a landscape where talent development and HR strategy are becoming more challenging.
How To Improve Your ESG Score
Now that you have a good understanding of what an ESG score is and why it matters, you may be wondering what steps you should be taking after receiving one. Our experts recommend that you first meet SEC disclosure requirements around human capital or climate risk, or based on any MD&A disclosure rules that affect your organization.
From there, your leaders will need to develop oversight and management systems to address ESG risk management and monitor its progress. This is where having the help of a knowledgeable ESG team can be beneficial.
When you work with a trusted ESG consulting team with a track record of helping companies implement strategies and initiatives to improve, it’ll help you get on the right track without wasting time. That way you can get ahead of ESG risks your company needs to address.
Our team can help you figure out everything from selecting the right framework, to establishing a structure, to creating a corporate ESG policy and improving your score. We’ll get to know your business and then guide you toward the most helpful recommendations while taking the stress of setting up an ESG program off the shoulders of your team.
Looking for guidance to lay a strong sustainability framework and achieve a successful ESG score? Contact our team to learn how our experts can help.