In order for ESG to be broadly accepted, there has to be a universally understood scoring system. For ESG this scoring has been through letters and numbers, with each system assigning specific ranks and outlining the significance and meaning behind them.

In the case of ESG disclosure scores, the score is based on what it says in the name - how well a company discloses information pertaining to ESG. ESG factors have been clearly outlined through other grading methods and those same concerns are used to determine the sustainability and ethical impact a company has in their daily operations and decision-making.

Denoted by a percentage in stock markets, the percentage is more of a rough estimate for where companies fall. However it accounts for the disclosure and compares its global standards - making it a highly reliable source of information.

Read: Why Your Business Needs ESG Reporting Software

What The Disclosure Score Accounts For

What makes up the entirety of the score can be boiled down to how well a company fares in disclosing environmental, social, and governance aspects. This is on top of the actions they are taking too. Specifically they handle the following in each category.

Environmental Disclosure

This aspect covers a company’s environmental impact and compares it to global standards. This score factors a company’s energy usage, carbon emissions, water consumption, waste management, and any efforts the company is making to reduce environmental risks. 

Social Disclosure

Like environmental, this will cover a company’s social practices and compare it to global standards set in their industry. It’ll look at the relationships the company has with stakeholders - employees, communities, customers, suppliers, and investors. 

It’ll also extend further for employees and consider a company’s labour practices, how diverse their employees are in entry and management positions as well as inclusion, and human rights. The score will also cover how engaged a company is with the communities it is in.

Governance Disclosure

Lastly is the governance structure and comparison to global standards. For governance, the score is based on a company's board composition, executive compensation, the rights of the shareholder, and what anti-corruption policies are in place.

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What Is The Point Of The Disclosure Score?

Based on the factors mentioned above, the disclosure score ultimately determines how well a company discloses those data points. These are disclosed through multiple company reports that a business puts out on the regular. Reports like their annual statements, sustainability reports, regulatory filings and other forms of corporate communication tell investors and these grading systems what these numbers are.

At the end of the day, the point of this score is a tell to investors that shows just how transparent a company is about these factors and what a company is telling to the world. It serves as a check for transparency on the company’s behalf as a low score means it’s hard to trust a company's word with regards to what they disclose. That, or they may be assumed to be hiding something.

But beyond that, the score also reveals how serious a company is about ESG. Having a high percentage means a business is taking ESG factors seriously and is open to sharing its efforts and progress in these areas. That much is crucial as more extreme weather and other crises are occurring around the world, as the climate crisis has become a part of daily global life.

Related: More Data, More Transparency: Why Are ESG Ratings important?

More Data To Work With

The more data that is available, the more reliable and clear that companies can be with investors and the public in the face of many challenges. The only thing to keep in mind is that these scores are going to vary depending on other larger factors such as the region the company operates in, the industry it’s in, as well as the reporting standards that are being used.

Even with regulations mandating disclosures, this only applies to a smaller amount of businesses and only in certain regions. Organisations like the Global Reporting Inititive (GRI) and the Sustainability Accounting Standards Board (SASB) only provide frameworks for companies and recommend them to be used. 

Soon enough, those frameworks will be standards, but until they are mandated globally, some companies will use these, others might not.

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