Everything You Need To Know About ESG Scores
Delta Air Lines, Inc.
Creating a sustainable business strategy and ESG scores go hand in hand. Typically assigned through several sources, the ESG scores serve as key indicators for investors on how businesses engage with specific issues that affect the planet and people.
But for businesses themselves, they can serve as the tools that provide guidelines and benchmarks that businesses can work towards. These could be as crucial as key performance indicators (KPIs) when it comes to those issues.
An ESG score may outline where there may be climate risks related to business operations, where things stand in terms of overall greenhouse gas emissions, where an organization's ESG efforts are falling short and a significant amount of effort is needed in another direction, or simply what kind of risk management policy or corporate governance should be considered to initiate beneficial changes.
For those new to ESG Scores, here are some key points to know:
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Methodologies and Providers
Similar to credit reports, there are several agencies that provide ESG scores, and each one has its own methodology. Some will use a range of 1 to 100 or 1 to 40+, while others will give lettering grades. But as different as they are, each one follows the same general principles and methods. The particular aspects that they evaluate are things like:
Company public disclosures
Reports
Regulatory filings
Industry benchmarks
Direct interviews
News sources
For each element of environmental, social, and governance, they are weighted based on the information uncovered that’s connected to those issues. For example, Delta Airlines will take a hit on its environmental score due to its carbon credit greenwashing.
In terms of providers, the significant ones that our site uses are Sustainalytics, Refinitiv, and MSCI. However, there are of course many others. Regardless, you can’t go wrong with any number of providers, and it’s a matter of personal preference and what is most relevant to your business circumstances.
Read: Sustainalytics ESG Risk Rating: A Guide for Responsible Investing
Specifics: More Than Carbon and Greenhouse Gases
As mentioned above, each aspect is weighted based on particular information that is available to the public. As such, the providers of ESG scores conduct a great deal of research pertaining to all kinds of sub-topics that encompass ESG.
Some examples of sub-topics are:
Environmental: company carbon emissions, whether they are trying to reduce emissions or not, how much emissions they have reduced, waste management, water usage, and whether they’re using renewable energy.
Social: diversity in various branches of business (board of directors, executives, management, etc.), community relations, and product safety.
Governance: board independence, how much money executives are making relative to employees, anti-corruption policies, and shareholder rights.
Scale and Ratings
Both the scales and ratings that each organisation uses vary, as there is currently a lack of a universal standard. Even so, the scores won’t be too different in how the end results are communicated. For example, even with different metrics, the scores have a colour coding system with green being ‘good’, yellow being ‘average’, and red being ‘bad’. Regardless of the description or numbers provided, being in the green is good.
How the different ratings and scales come into play provides more specific details and precision. Using a combination of analytics helps to paint a bigger picture than relying on a single individual source. That much is clear when the scale that’s used can vary from 0 to 100, 1 to 10, 1 to 40+, or use grades or descriptions.
As a general rule, it’s good to rely on sources that provide a descriptive label or letters and compare those to ones that provide specific numbers.
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Industry Comparisons
Thanks to the IFRS Foundation's formal announcement, ESG reporting as a whole has a formalised standard. Coinciding with scores, which do factor in those same ESG reports, ESG scores can serve as comparisons to individual company goals and progress. However, they can also be compared to other businesses within those same industries, regardless of country.
Even with other countries formulating their own reporting standards, such as Europe and their European Financial Reporting Advisory Group (EFRAG), there will steadily come a time when publicly traded companies will be following a universal standard or some standard recognised by the IFRS Foundation.
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Evolving Standards
Even with reporting standards in place and many companies firmly established, the ESG score is still evolving and changing. This is largely why any given ESG score may vary so much and why there are different methods and scoring approaches among the agencies.
This isn’t a bad thing, as it’s a matter of adapting to new changes and recognising that a score in isolation doesn’t always provide the full picture. Heeding the scores of multiple agencies, though, does help in painting a company’s broader picture and their efforts, which is the whole goal of ESG scores.
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Takeaway
An ESG score provides companies the chance to take stock. Yes, it may be part of certified climate action projects, verifiable emission reductions, or other initiatives to openly combat climate change for the interest of potential investors, but it's more about the development of insights that indicate where you actually are and what your future trajectory may be based on that knowledge.
Knowing how your company truly uses resources, whether environmental or social, is important data from which to ultimately assess how ESG can work for you. Which projects reduce performance and which make investment seem less attractive? Are your solutions misplaced and should you be engaged elsewhere to see increased levels of interest both from clients as much as from your employees?
An ESG score is the first step to creating a habit, an operational mechanism, that openly lets a company engage in change for the better. Business leaders can commit by taking this a step further and working out their individual ESG score.
Want to know how businesses are performing? Refer to our Company ESG Profiles for updated published ESG scores and sustainability reports on thousands of global firms.
